The Kenya Tea Development Authority (KTDA) has continually undermined the tea sector by employing manipulation and predatory behaviour which affects what farmers earn.
For a long time, the KTDA and subsidiaries in the tea value chain have taken advantage of their dominance in the market to undermine tea auctions, curtail price discovery and exploit the vulnerabilities of smallholder tea growers.
KTDA supplies over 60% of the tea traded at the auction and has consistently used its market power, dominance and influence to sway tea prices.
In addition, Agriculture CS Peter Munya says that KTDA has been instigating the sale of tea from smallholder tea growers through an opaque and non-transparent ‘sale by private treaty’ (commonly called Direct Sales Operation).
“This process is further catalysed by a generous credit facility of between 30 to 120 days given by KTDA to buyers without any requirement to provide any guarantees for the teas bought. As a consequence, buyers interested in Kenyan tea do not have any commercial incentives to compete and push tea prices at the auction because of the opportunity to negotiate a sale by private treaty with KTDA outside the auction, sometimes at below the auction prices,” said Munya when he announced policy, regulatory and administrative reforms in the tea sector in Kenya on Thursday last week.
He said that because KTDA managed factories supply over 60% of tea to the auction, price discovery at the auction and the entire auction process is undermined by this parallel window; and tea prices are depressed.
Furthermore, due to absence of any security embedded in KTDA’s sale by private treaty arrangement, significant amounts of farmers’ money has been lost to buyers who were supplied tea by KTDA and refused or failed to pay.
Munya added, “In addition, due to lack of transparency and accountability in the way KTDA executes sale by private treaty, the process gives unfettered discretion to KTDA officials and is therefore a fertile ground for rent seeking and other governance transgressions at the expense of small scale tea growers.”
The CS cited the October 2019 and December 2020 period where as a direct result of the governance gaps, KTDA managed teas consistently underperformed the teas from Rwanda and Burundi on month to month basis.
“It is plausible to postulate that the cumulative adverse socio-economic impact visited on small scale tea growers and the macro-economy by this behaviour by KTDA over extended periods of time is monumental,” the CS added.
KTDA has also been imposing exorbitant, exploitive and grossly opportunistic fees on smallholder tea growers for management services offered to factory limited companies.
The Management Service Agreement between KTDA and Factory limited companies has a management fee of 2.5% of value of tea earnings by the factories. To demonstrate the exploitive and exorbitant nature of this fee, KTDA managed tea factories currently sell between 180,000 to 200,000 million kilogrammememes of tea from over 600,000 smallholder tea growers annually.
At an average price of about US$3.5 per kg, teas belonging to these smallholder tea growers handled by KTDA under the management agreement generate a value of between Ksh 60 and 70 billion annually. At a management fee of 2.5% of the value of tea sales for management services, KTDA holding and its subsidiaries gobble between Ksh 1.6 and 2 billion every year in fees.
Munya said these fees were onerous and unjustifiable because there is no justification for setting the fees for a management service, just like any other consultancy service as a percentage of the gross earnings of a client. Best practice is to set such fees on a cost reflective lump sum fee basis that includes a reasonable and competitive profit margin for the service provider.
He added that there has been no observable correlation between the growth in these colossal earnings by KTDA and a commensurate growth in earnings by tea growers. On the contrary, earning by tea growers on a Kenya shilling per kilogramme of tea basis have been on consistent decline while earnings by KTDA have increased.
He said that the hefty fees and all the other “toxic clauses in the management agreement” are a result of a “lopsided, opaque and highly conflicted contractual management relationship between KTDA and the factory limited companies”.
“The KTDA company secretary also doubles up as the company secretary for all the factories. KTDA and its subsidiaries have literally been negotiating management service agreements with their own company secretary occasioning serious conflict of interests. It is therefore inconceivable to expect that a contract emanating out of this defective structure can yield a fair and balanced contract that protects the interest of farmers,” Munya said.
KTDA has also been retaining large amounts of tea farmers’ money usually deducted at source and misapplication of these monies by KTDA as follows:
- Investments in a litany of subsidiaries ranging from power generation, insurance, tea trading, tea transportation, logistics and warehousing, microfinance and equipment manufacturing among others with little or no demonstrable direct benefits to tea farmers;
- Holding large amounts of farmers’ money in low interest-earning fixed deposit accounts in commercial banks while syndicating expensive commercial loans for the same tea farmers;
- Holding large amounts of small scale tea growers’ money with commercial banks that have a weak financial base leading to loss of billions on shillings. Two commercial banks have over the recent past gone down with billions of smallholder tea growers’ money in deposits made by KTDA which demonstrates a general absence of the usual abundance of caution expected of an institution dealing with vulnerable communities.
Munya said that there was also an orchestration of a litany of inter-factory loans and advances among tea factories using tea earnings from other factories.
“Currently, a number of tea factories owe and are also owed monies by other factories creating a lot of confusion in the sector,” he added.
He also discredited the inordinate delays in making prompt payments to smallholder tea growers despite receiving payments from tea brokers within fourteen days from the date of the auction.
He said, “This has decimated the cash flow position of small scale tea farmers who have resulted to tea hawking to cater for their basic needs. In addition, delays in making payments to farmers has had the negative effect of ensnaring tea farmers to borrowing expensively from shylocks and other informal leaders to cater for basic expenses such as food, health care and school fees for their children.”
Munya also highlighted the tea price volatility saying that this led to unstable cash flow for tea farmers.
With this, Munya said that the new regulations would address the challenges and inject new momentum in the sector which remain resilient despite all the problems plaguing it.
The regulations will take place in two months.