Kenya's tea sector reforms faces hurdles under new law

One morning of September 2019, Joseph Getoke a tea farmer in Masaba South in Kisii woke up to his tea farm as usual.

However this time instead of tending to the bushes or pluck tea leaves, he went in with five men he had hired to clear the bushes so that he can plant bananas.

He told the Star he could not take it any more following a string of dismal returns.

"We have other options, my land can equally support banana and vegetables," he said as he lowered his machete upon another tea bush.

At Metembe area in Kisii , an angry John Getacho hired a tractor to uproot his 800 tea bushes.

The farmers were decrying low returns from the crop which has for decades remained a leading export commodity and foreign exchange earner for the country, where Kenya accounts for more than 22 per cent of the total world tea exports.

In an address to the Nation in January 2020, President Uhuru Kenyatta called for reforms in the tea sector which would benefit farmers.

This set the country on a regulatory shift aimed at streamlining operations in the sector, that culminated with the signing into law of the Tea Bill of 2018, on December 23, by the President.

The Bill introduced a raft of measures among them revival of the Tea Board of Kenya, changes in the auction process and export, limiting the number of tea factory board members and a new levy among others.

“Generally, the new law creates an environment that encourages development of the tea sub-sector. In the long run, this will be beneficial to the smallholder tea farmer,” said Alfred Njagi, Kenya Tea Development Agency Managing Director for Management Services.

According to the agency, the new law presents opportunities for the sub-sector to enhance marketing of the product across markets that have hitherto not been Kenya’s mainstay for export.

It is expected that the Tea Board, in this regard, will play a crucial role in ensuring that the country unlocks more markets for Kenyan tea, which will subsequently translate to more income for the farmers.

“The Tea Research Foundation will equally play a critical role in ensuring that we enrich our tea, diversify our products and ensure that our tea remains competitive for the long-term. It is anticipated that through the Foundation, our farmers can earn more money when the country is able to produce specialty teas at a broader scale,” Njagi said.

The provision demanding that tea growers must be registered with the tea factory to which they deliver green leaf is important in that it will deal with the issues of tea hawking that has, oftentimes, denied smallholder tea farmers the full benefit of their crops, the agency further notes.

SETBACK

A number of setbacks are however on the offing as the government moves to implement the regulations, which were hard pushed for by the Agriculture Cabinet Secretary Peter Munya, who has been keen to reform the country's tea sector.

If implemented in its current form, the new law is likely to crush the commodity's prices, increase factories' operational costs and reverse gains made in the past to cushion farmers from high taxation, that ends up eating into their earnings, pundits have argued.

The new law provides that all tea processed and manufactured in Kenya for export, with exception of orthodox and specialty teas, be offered for sale exclusively at the auction floor.

This denies Kenyan producers access to the direct sales market that on average delivers higher prices than the auction, which last year fetched an average $1.93 (Sh211) at the Mombasa weekly, a drop compared to the previous year's average of $2.05 (Sh224).

“Anything below two dollars is not good,”East African Tea Trade Association managing director Edward Mudibo told the Star.

A blockage on direct sale is likely to see buyers relocate to neighbouring countries to service their needs at the detriment of Kenyan producers, KTDA has urgued.

During his last year January address, the President had indicated a preferable mix of 80:20 per cent auction and direct sales.

All tea buyers or exporters shall also value add at least forty per cent of their annual Kenya tea exports within eight years of the commencement of the Act, a move that could possibly reduce demand of Kenyan teas if buyers opt to buy teas from other countries.

This will lead to low prices and payments for small holder farmers, a reversal of government's plan to have farmers earn more.

Meanwhile, the Cabinet Secretary, under the new law, may by through a Gazette notice, impose a levy to be levied on tea exports and imports, to be known as the tea levy.

The levy imposed through a notice under subsection (1) shall be collected by the tea board at a rate not exceeding one per cent of the auction value for teas sold through the auction.

This is a return of the Ad Valorem levy that was revoked on June 24, 2016 due to stakeholder feedback on the impact it had on farmers’ incomes, where buyers would recover the same amount from producers’ tea prices hence lowering incomes for small holders.

The levy comes with the creation of a stabilisation fund which sector players say though noble, its funding needs to be rethought.

In its current format, the fund would be funded using a tea levy which is equivalent to one per cent of all teas exported.

“In the long run, this will end up eroding farmers’ income as the cost is passed down to the same farmers,” Njagi said, even as industry players call for a review of the law if it is to benefit farmers and grow the sector.

Meanwhile, a tea factory shall within 30 days of sale of tea pay 50 per cent due for green leaf delivered every month and the balance within three months from the end of the year.

The ratio has been on average 30:70 initial and second payment with the understanding that the lump sum second payment is used to fund household development projects, settle school fees among other uses, sector players note, adding that farmers should choose how they wish to receive their payments.

“If the bill is implemented in its current form, it will do more harm than good to our farmers and shake the industry to its core,” said Apollo Kiarii, CEO Kenya Tea Growers Association.

MANAGMENT HITCH

Management of tea factories has also been shaken under the new law which sector players say could affect smooth operations of these entities, while increasing their cost of running.

It limits the number of tea factories directors to five as opposed to the previous six members, each drawn from an electoral area, while imposing a gender rule through elections.

This provision removes the rights of shareholders to determine the size of their boards as enshrined in Company Law and the Constitution of Kenya.

It also attempts to amend the current memorandum and articles of factory companies’ that provide a board to comprise of a minimum of five and a maximum of nine members, without involving the shareholders.

Mwongozo, the Code of Governance for State Corporations, provides for a board of between seven and nine members.

Further, the law requires that directors of a tea factory companies be elected through ademocratic system of one grower one vote, contrary to company law that stipulate that the board be elected through shares.

It also provides for the management agent agreement limiting the remuneration of management agent to 1.5 per cent of net sales value of tea sold per year.

The clauses will have negative impact on the operation of KTDA, it says, where limiting remuneration fee to 1.5 per cent (from 2.5% currently) of net value of tea sold – KTDA will not be able to operate the current scope of services.

“It amounts to folding up KTDA as currently set up,” the agency says in a document seen by the Star.

KTDA management services is a break even company which made a profit of Sh15 million and Sh57 million in 2019 and 2020, respectively.

A one per cent (1%) reduction in fees removes Sh750 million from its revenues at last year’s prices and crop, that totaled Sh1.9 billion, leaving Sh 1.15 billion.

“The rate should be left to the agreement between the contracting parties,” the agency notes.

Meanwhile, staff cost for the personnel seconded by management agent will be borne by management agent, a move that is likely to make provision of these services unsustainable. This cost amounts to Sh867 million.

“Managing agents will have to reconsider their existing arrangements with tea factories, “ Njagi said, “Invariably, management agents will have to review the scope of services offered to factories for the chargeable fees and let factories seek the balance independently from the market without the hitherto benefits of economies of scale.”

Another similar amount is used up to for the rest of the staff costs, totaling Sh1.7 billion against an income of Sh1.15 billion , making the company operations untenable.

Other provisions include company secretarial services being excluded from services offered by management agent where factories will be required to have in- house company secretarial services or out source, while a director of a tea factory is not allowed to serve as in another company.

These are likely to increase operational costs and affect running of companies, respectively, where KTDA Holding is an investment company owned by 54 factories, owned by over 600,000 farmers.

“It is important the shareholders (factories represented by directors) have a voice in the running of their company and subsidiaries in accordance with the requirement of the companies Act,” KTDA says in a memorandum touching on the new law.

Small-holder farmers produce 60 per cent of Kenya's teas the remaining 40 per cent coming from private commercial investors.

In October last year, the 54 tea factory companies managed by the KTDA released Sh27.62 billion, being the final payment, popularly known as “bonus”, to tea farmers.

This is for the Financial Year ended June 30, 2020.

It took the total payment for the year to Sh51.85 billion; up from Sh46.48 billion last year.