State dishonest on tea sector reforms

It’s my prognosis that we may be seeing the last days of the vibrant tea sector in Kenya, thanks to government interference.

The move to privatise Kenya Tea Development Agency (KTDA) in 2000 was strategic to hand the sector to farmers and keep the government at bay but it seems to have found its way back.

More than 560,000 tea farmers, who own KTDA, deliver 60 percent of green leaf produced in Kenya to their 65 factories.

Its model of managing cultivation, extension services, production, procurement of farming inputs, transport logistics, warehousing and marketing is considered the most unique and successful value-addition integration strategy in the world managing a commercial cash crop.

Through this value-addition chain, KTDA directly employs more than 10,000 people.

This successful model that has worked well for 20 years is now facing its biggest threat.

It’s a fact the KTDA has been suffering from poor corporate governance practices and conflict of interest among its top management. But the government has used this pretext to destabilise the sector instead of addressing the real mismanagement problem. This was not the first government has uncovered mismanagement within KTDA. The 2007 Tea Industry Task Force Report, uncovered a similar problem but handled it better pushing for corporate governance issues like decentralising operations and empowering farmers into ownership at arm-length.

But today, we have a government that is the judge, jury and the executioner, and a bad one at it.

Last year, Cabinet Secretary Peter Munya accused the agency of instigating the sale of tea from smallholder growers through an opaque and non-transparent sale by private treaty commonly known as Direct Sales Operation. However, what KTDA was doing was to negotiate a sale by a private treaty, outside the auction, which sometimes may be below the auction prices.

Now, this isn’t new. Many businesses do so, especially in the foreign exchange trade. A company may choose to go for the spot rate (prevailing rate) or negotiate for a forward rate, which may be below or above the spot rate, to address exchange rate volatility risk.

The interesting part was that Mr Munya’s accusation changed this year. A few months ago, he defended the Mombasa tea auction raid by detectives, saying KTDA and the East African Tea Trade Association (EATTA) that runs the Mombasa tea auction were fixing prices by withdrawing huge volumes from the trading floor to negotiate a back deal for the same tea.

Now, elementary economics should inform Mr Munya that if KTDA was withdrawing huge volumes from the trading floor, it would shrink the supply of tea, leading to higher prices and disincentivise such a back deal.

There is nothing criminal about this. The agency is just being strategic, and any auction should accord the seller this right of withdrawing their product from the market if they feel their product is underpriced. But where this accusation fails to hold is that KTDA is not dominant — only responsible for 10 percent of total purchases at the Mombasa tea auction, to have the market power to fix prices.

The government is now contemplating introducing a minimum price and one wonders how in the world can an auction have a minimum price?

But let’s take it that price manipulation is happening at the auction, is the Directorate of Criminal Investigations raiding the auction the right approach skirting away with equipment that runs the auction paralysing the operations of the auction for a day?

The tea auction serves the eastern Africa region and is one of the top three global tea auctions. The EATTA, which runs the auction, draws membership from all tea producers. The minister should have invited the Competition Authority of Kenya to investigate the price fixing allegations rather than the DCI who ended up shutting the auction, which plays a key role in the Mombasa economy.

We should not forget that the Dubai tea auction continues to pose a threat to our Mombasa auction, so we cannot afford such slip-ups.