New radical proposals to pull NCPB out of financial mess

Nairobi, Kenya: Struggling National Cereals and Produce Board (NCPB) is to undergo radical restructuring that will see it transform into a commercial outfit.

Besides the change of name to Grain Corporation of Kenya (GCK), the floundering entity is to be exempted from the provisions of the State Corporations Act Section 5A to enable it compete with the private sector.

In a far-reaching shake-up proposed by Ernst & Young, a consulting firm, the reorganised body would be transformed from only handling cereals and grains to expand its scope to deal in a wide range of products. Currently, NCPB is restricted to dealing in maize, sorghum, wheat and rice. “Being a commercial entity, its products will have to compete with those from the private sector. GCK will therefore trade its food products through‚ Nafaka Products to protect it from competition,” the report by Ernst & Young says.

If the plan goes through, the new NCPB will be captained by directors from the private sector but then it will have to compete with private companies in the supply of farm inputs using its network across the country.

The advisor to the Presidency on food security, James Nyoro, says the crucial ingredient in the restructuring is the separation of social and economic functions on NCPB.

“NCPB has for a long time played these two central but competing functions, which needed to be separated. But the challenge is whether the new commercial roles entrusted on NCPB will compromise operations of the private sector by crowding them out,” said Dr Nyoro.

Since 1988, a private sector marketing channel has competed with NCPB with prices in the private sector being set by market forces. “Will NCPB still be used in price stabilisation? Will it be of any help?” he posed.

“Currently, NCPB supplies subsidised fertiliser paid for by the government but which is sourced at much higher prices because of the low quantities purchased and lack of market understanding as opposed to countries like India and South Africa,“ said grain management consultant Mwangi Joakim.

He said local commercial companies purchase fertiliser at much lower prices than NCPB which sells the commodity at lower prices to cover for the subsidy to the farmers.

Indeed, this has been the dilemma facing NCPB. On one hand, there has been pressure to ensure that maize farmers receive adequate price incentives to produce and market their crop. On the other hand, the food security of a growing population requires keeping maize and fertiliser prices low.

Farmers have also for many years complained that most of the fertiliser is bought by middlemen and repackaged for sale at the market rates in Kenya, Uganda and Tanzania.

The Ernst and Young report now calls for co-operation between GCK and county governments in food basket areas such as Trans-Nzoia, Uasin Gishu, Bungoma and Nakuru to import fertiliser on their behalf in order to boost food production in Kenya.

The Grain Corporation would be divided into two main business units, Nafaka Products and Warehousing operations. With a network of 110 warehouses throughout the country, Ernst & Young says this is a crucial prerequisite for a successful regulated Warehouse Receipting System (WRS) ‘to support an efficient agricultural commodity trade’.

“We recommend GCK to start warehouse receipting division, which will graduate to a national warehouse operator. In order to operationalise the WRS, the government should provide a policy and legal framework for licensing and supervising independent warehouse operators,” the report said.

For a warehouse receipt system to be viable, it is proposed that there must be a robust legal system to support pledge instruments, such as warehouse receipts, as secure collateral. Ernst & Young says this calls for a warehousing legislation, which must meet a number of conditions such as warehouse receipts must be functionally equivalent to stored commodities. In addition, warehouse receipts must be freely transferable by delivery and endorsement.

However, the report fails to offer strategies GCK should adopt in bringing down the warehousing receipt costs, which are currently way higher than the international rates. Today, the average cost of warehousing as a proportion of cost of maize is 6.8 per cent. Yet, internationally, the figure should be in the region of between one and 1.5 per cent for 30 days.

The proposal to convert NCPB into a commercial entity is likely to be slugged by the lack of clear title to come of its properties included in the firm‘s fixed assets register and balance sheet. Where titles are lacking and assets have been developed through partial development plans where NCPB registered interest is storage, technically it might not be possible to sell such assets.

Critics say these challenges, coupled with the dispute as to who has the right to use the properties, will continue affecting any NCPB divestiture programme. For assets that are serviceable, such as driers, weighbridges, depots and warehouses, the report recommended for an upgrade while those that are obsolete be disposed. The report said the Kisii Depot drier that has not been operational for many years, for instance, should be converted into a maize milling plant to create more employment and more income for the depot.

“New generation bulk grain systems with capabilities to temperature sense, moisture sense, detect insect activity and able to determine the quantity of grain in each bin be installed to replace the old and obsolete equipment,” the report said.

As at June 2011, NCPB‘s total non-current assets were worth Sh8.9 billion. This, however, dropped to Sh8.5 billion in the succeeding year due to depreciation. The firm’s idle assets as at June 2012 represented 30 per cent of the total non-current assets.

The report recommends that the government moves away from directly dealing with maize in the form of strategic grain reserves. It argues that maintaining the reserve is “very costly” for the government. “The best practice is to allow GCK to continue trading the maize and other grains and the government will monitor the reserve to ensure that at any point in time the Board and other players have atleast the required minimum reserve in existing storage facilities,“ says the report.

So as to separate the commercial and SGR functions of the reinvigorated NCPB, the body will formulate operational rules that will guide the management of activities to be carried out at the direction of the government and within the context of NCPB’s commercialisation policy and strategic plan.

But transforming NCPB into a commercial entity will obviously be an arduous task. Its balance sheet is burdened by inadequate working capital, attributable to the Sh2.2 billion loss incurred in 2002 which arose from the selling of commercial maize through government subsidy.

The failure by the government to pay Sh3.1 billion debt, which had been envisaged in the Reform Strategy of 1998 Commercialisation, is likely to delay further the ambitious plan. Despite paying in phases, those familiar with the deal say “the instalments paid over eight years mainly went to finance operating overheads instead of commercial activities”. Importantly, the government owes NCPB Sh3.5 billion incurred in the 2012/2013 financial year as a result of SGR stock and fertiliser supply.

Regrettably, NCPB cannot borrow or dispose of its non-core assets without Treasury’s approval due to its parastatal status. The delays in obtaining borrowing approvals affect the timing of accessing the funds, and therefore ability to take advantage of favourable spot market developments.

Besides its shaky balance sheet, commercial interference emanating from the government and the tendency for agency fees from the government to be paid late or not paid at all could further strain the resuscitation.

As part of its package of reforms for NCPB, Ernst & Young is now calling for a radical clean-up of the Board‘s balance sheet. The consulting firm says: “We recommend the Board and the Government explore ways of reversing the negative revenue reserves. This will include implementing measures geared towards bringing back GCK to profitability.”

To give the Board a head-start in its commercial undertakings, experts say the government should also inject working capital cash. “The profits made when NCPB start trading will systematically clear the accumulated losses from its books,” said the report.