Danger of parallel maize markets

President Uhuru Kenyatta must have had good intentions when he recently announced that the government would buy maize from farmers at Sh 2,500 per bag. It was an improvement from the first offer that the government had announced of Sh2,000.

And, Rift Valley maize farmers are a politically influential lot. Yet while the Sh2,500 per bag offer made for good politics, it was bad economics. I say so because as things stand, the government has created multiple parallel markets.

The National Cereals and Produce Board (NCPB) will now be buying some 1.7 million bags of maize from farmers at Sh2,500 while selling the same maize to millers at Sh1,600. Another 300,000 bags – the remainder of the maize the government imported from Mexico and South Africa last year is to be sold to millers at Sh1,400 per bag. Mark you, the government paid Sh4,000 per bag for the imported maize.

Which begs the question: How is NCPB going to manage access and determine the traders and millers who will be allowed to buy the maize that sold for Sh1,600 per bag? What is to stop unscrupulous dealers from purchasing maize on the cheap and then selling it back to the NCPB at Sh2,500?

When you give bureaucrats too much discretionary powers- such as allocation of quota rights, you provide opportunities for corruption.

When you create a market with dual and multiple prices, rent-seeking activity increases. What we have now is an environment where maize is going to be sold both at state-subsidised prices and on the free market.

Worse still, you have a maize market where millers command sufficient monopoly power to create scarcity. As things stand, we have a perfect environment for the phenomenon that economists call ‘arbitrage’: once you get an allocation letter from a high office directing NCPB to sell to you maize at Sh 1,600 per bag, you can sell the allocation letter to a miller in the secondary market at a handsome profit.

If I were one of those unscrupulous traders or millers who own large warehouses within NCPB’s premises on lease, I would just engage in arbitrage and make huge profits by buying from NCPB on the cheap and selling it back to the same NCPB without moving the maize from the leased warehouses and without incurring any transport costs. It is a very opaque situation because millers and traders have leased massive space.

In 2009, we saw how a maize subsidy scheme introduced by the administration of former president Mwai Kibaki with noble intentions was hijacked by buccaneers and a tiny power-broking elite, which colluded with their friends in high places to make a killing from peddling influence. There were instances where influence peddlers earned as much as Sh500 for every 90-kilogramme bag of maize.

Audit firm Pricewaterhouse Coopers that was brought in by the government to investigate the scandal concluded that the scheme had been badly designed, leaving huge loopholes to be exploited by briefcase traders.

There was no criteria for ensuring that recipients of the subsidised maize passed on the benefits of the subsidy to the consumer.

Everyone who felt he had power wrote letters to the NCPB CEO to request maize allocations for their friends and business partners. Ministers, permanent secretaries, top government officials and MPs all joined the gravy train.

Despite the fact that traders were expressly prohibited from purchasing the subsidised maize, this category hogged a massive 27 percent of the business. And even as thousands of bags of imported maize were being poured into the market, the PwC investigation showed that consumer prices kept rising.

The government must immediately start implementing reforms aimed at dismantling NCPB so that we consign this command and- control era parastatal to where its peers such as the defunct Maize and Produce Board, the Wheat Board, the Sugar and Cereals Finance Corporation and the likes of the Kenya National Trading Corporation were dumped.

The NCPB is firmly under the capture of corrupt millers and traders. Does it surprise that every time we have a maize or fertilizer imports scandal, the names of millers and traders that come up are always the same. The NCPB has evolved into the biggest locus for corruption in the agricultural sector.