The big storm in a tea cup – players spoiling for a fight

Tea industry players are opposed to proposed regulations that could bring radical changes in the management of the sector.

The sector players have now set the stage for a major clash with the Government which has mooted the regulations.

Agriculture Cabinet Secretary Peter Munya has openly expressed displeasure in the manner the sector is managed.

In a statement posted on his docket’s website, Mr Munya has argued that the proposals are targeting to help small holder farmers get a better deal.

At the same time, Munya said, the rules will rejuvenate the sector which has in the recent past faced many troubles.

Munya has cited three issues that he claims are killing the tea sector: the Mombasa based auctions held every week, the Kenya Tea Development Agency (KTDA) and fluctuating tea prices.

The sector players, however, say Munya’s proposals will bring the worst effect especially on small scale tea farmers, who are important to the sector.

“The Government has noted the challenges facing the tea sector being a dysfunctional auction system, control of KTDA, and low and unstable tea prices,” Munya said while making a case for the regulations.

In the proposed regulations, the Government wants changes at the auction, including its immediate automation. It is also demanding the outlawing of direct tea sales. The regulations also propose changes in relations between tea factories and KTDA. Currently, KTDA is owned by 54 tea factories. It in turn manages these same factories. 

Through these regulations, the Government wants to compel the tea factories to sell their stakes in the agency.

The proposals come after a presidential directive issued last December in which President Uhuru Kenyatta directed the Ministry of Agriculture to look into ways to increase money in the pocket of the small scale farmer.

Industry players and observers note that some of the proposals might not be what the president had in mind. If anything, the proposals might end up deeply hurting smallholder farmers who produce 60 per cent of tea sold in Kenya and abroad. The proposals, according to experts in the sector, could see tea join the league of other dead or dying cash crops in the country.

Aside from horticulture, tea is the other cash crop that has defied the trend that other crops have taken, with production and earnings from coffee having been on a steady decline for years. Others like pyrethrum, cotton and sugarcane are either on their deathbed or dead.

“No doubt, tea from the small scale tea farmers is the only cash crop in the country that has survived many Kenyan regimes and is envied across the globe. The other tea factories that are for instance owned by multinational companies are nowhere near the production level of the Kenyan small scale tea factory companies managed by KTDA... this pride and unassailable achievement would be rendered naught were KTDA be forced to exit the arena on matters small scale tea farming in Kenya,” said KTDA lawyers in submissions to the Ministry of Agriculture.

“The intendment of the impugned regulations is to sabotage and ground the architecture, structure, organs, soul and mind of the pillars of the entire small scale tea industries in Kenya.”

The lawyers further argued that by pooling together resources of different factories, KTDA is able to cost-effectively deploy key personnel to factories. It is also the case for other services such as software and warehousing as well as negotiating cheap credit facilities from local and international financial institutions.

KTDA has asserted that among the areas where tea farmers have greatly benefited from pooling together resources is the acquisition of fertiliser.

Last year, fertiliser imported by KTDA was distributed to farmers at an average price of Sh1,996 per 50 kilogramme bag. This was in comparison to Sh2,800, the market price for a 50kg bag of fertiliser, 40 per cent above what KTDA was selling to farmers.

“KTDA would be compelled to pull out of the affairs of the 54 small scale Tea factory companies. The consequent operational and financial damage as well as loss to the subject companies would be nothing less than killing the entire small scale tea industry in Kenya,” said the agency’s lawyers.

“The regulations prohibit directors from sitting in a management company and its affiliates. This means that the 54 tea factory companies that are shareholders of KTDA by virtue of which they elect directors have to sell their shares to third parties for there to be compliance with these regulations. The question is, who is interested in purchasing these shares?”

The lawyers also opine that the business model that will be implemented by the factories will need farmers to sell their stakes in tea factories. It would also mean that they would have to pay to have their tea processed at the factories, further hurting their earnings.

As opposed to making it easier for players in the industry, Munya appears to be introducing more hurdles, contrary to the Crops Act. According to the KTDA’s lawyers, the Act requires the Cabinet secretary to make regulations that foster growth of the sector, for instance, by reducing unnecessary bureaucracy, cutting levies and taxes as well as do away with barriers that hamper movement of crops and ensuring that the sector is not over-regulated.

The proposals introduce a series of new levies and at the same time require tea sector players to constantly seek what could be unnecessary approvals from both the Ministry and the Agricultural and Food Authority.

The East African Tea Trade Association (EATTA), which runs the Mombasa tea auction, noted that there is little in the proposed regulations to improve the operations of the sector.

Edward Mudibo, managing director of EATTA said while there are some positive aspects, most of the proposals are flawed and would take the sector backward if implemented as proposed. “Some of the provisions will have a positive impact on the tea industry,” he said.

“However, there are provisions that have far reaching ramifications on the tea sector. Most of the provisions do not reflect well for the tea sector.”

Munya had said the auction is one of the industry’s problematic areas terming it as dysfunctional. Mudibo, however, defended the auction as transparent and open for audit. He noted that the auction is among the reasons why Kenya’s tea sector is respected globally. “The ministry talks of collusion but cannot support that with evidence,” he said. “The ministry should come out and provide evidence ... our records are available from as far back as when the association was started. The ministry on one hand says the auction is dysfunctional and opaque but again wants 100 per cent of teas sold through the auction, showing inconsistency.”

He added that EATTA is in the process of automating the auction, a process it started three years ago. An electronic system, which is being implemented in collaboration with Trademark East Africa, is expected to be operational in the coming weeks.

The proposed subsidiary law requires buyers to add value to at least 40 per cent of Kenya’s tea before export within two years. This could, however, pose challenges, with Mudibo noting that this is too short a timeline. Additionally, he notes, many buyers of Kenyan tea prefer it straight as opposed to value added.

“That is unrealistic. It would require huge capital investment and government support as well as time,” he said.

“The State may have borrowed this from Sri Lanka. The Asian country has a robust value added industry that was built for over 20 years and the government there has provided necessary infrastructure and incentives. Value addition should also be demand driven. Countries like Pakistan, which buys 40 per cent of Kenyan tea, take straight teas.”

The regulations require all teas produced in the country, save for orthodox and purple teas, to be sold through the auction. The Kenya Tea Growers Association, however, noted that this might not necessarily fetch better prices.

KTGA, a lobby for large scale tea producers, noted that direct sales – which the regulations outlaw – sometimes tends to offer better prices than the auction while in other instances, some producers have forward contracts with buyers. Restricting sales to auction is also anti-competitive and may have the effect of lowering prices due to lack of competing platforms.

“Dependence on one selling channel can lead to a lowering of prices. It is clear that the auction and private channel (direct sales) complement each other in obtaining the best possible average price,” said KTGA in its submission on the proposed regulations.  

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