Why agency wants fresh audit report on tea market dismissed

The Kenya Tea Development Agency is in a tight spot again over claims of monopolistic tendencies and collusion with cartels to eat into farmers’ earnings.

Barely a year after a report by the Tea Board of Kenya (TBK) accused the agency of the same malpractices, a study commissioned by the Competition Authority of Kenya (CAK) has put KTDA in a tight corner.

The agency now finds itself in the same position it was last year, only this time round locking horns with the anti-trust watchdog, whose report seems to corroborate the claims by TBK.

Last year, the competition authority appointed audit firm Deloitte to study the competitiveness in the tea sector value chain following a  report by the tea board accusing major players in the industry of colluding to fix prices, hurting millions of farmers.

Last week, KTDA went to court seeking to quash the findings of the report by Deloitte. The audit accused the agency of near-monopoly practices, saying its ownership structure hinders competition.

KTDA, which represents small-scale farmers, filed the suit in a bid to stave off punitive action from the CAK arising from Deloitte’s recommendations.

INSIDER INFORMATION

The agency now wants the court to stop the competition watchdog from making any decisions based on the new  study.

Weak regulation

“Some KTDA officers were approached with questionnaires, which were filled out in answer to some specific questions and there was an assurance that the views communicated would be treated with utmost confidentiality,” said KTDA in suit papers filed on Wednesday under a certificate of urgency.

Deloitte’s survey established that the tea industry has a weak regulatory framework and lacks a national policy to guide legislation and regulation.

It notes that KTDA is part of the industry regulator — the Tea Board of Kenya — and therefore can use its position to access insider information and use it to lock out potential competitors. “This problem is compounded by the fact that the dominant players in the sector, KTDA Limited and East Africa Tea Trade Association operate as private limited companies, a status which shields them from public scrutiny and government oversight,” reads the report.

The impact of a weak regulatory environment, the survey says, is reflected in low productivity, poor services and a limited inflow of private sector investments in processing, blending and packaging of tea.

Although KTDA was privatised and its named changed from Kenya Tea Development Authority in 2000, Deloitte notes, the agency still controls  small tea factories across the country because of uncompetitive environment.

After the privatisation, the report says it was envisioned that other agents would emerge to compete with the agency in managing tea factories.

However, barriers including an ownership structure that insulates KTDA from competition has made entry of other players difficult, therefore granting the agency a monopoly in the management of small-scale tea factories.

KTDA lost focus

“It is therefore instructive that 14 years since the liberalisation of the sector, no new managing agent has been able to penetrate the smallholder subsector to provide management services to any of the 65 smallholder factories,” notes Deloitte.

Unlike in other industries such as energy and telecommunications where liberalisation resulted in scaling down of the mandate and functions of state monopolies, the report says the opposite was achieved in the tea sector.

PRICE MANIPULATIONS

The study observes that KTDA has lost focus and “adopted an unclear mandate” to the detriment of farmers.

For instance, the agency is currently involved in a wide range of ventures including insurance, microfinance, banking, real estate development, tea trade and tea packaging.

It is also involved in electricity generation, secretarial services, warehousing and consultancy on top of its core roles of extension, green leaf logistics, tea processing, sales and marketing.

“On the general industry competitiveness, the study found that where there is a near natural monopoly like KTDA, there is need to regulate in order to protect vulnerable farmers (from price manipulations),” says the report.

Deloitte recommends that the government reviews liberalisation of the tea industry to address outstanding challenges by making it possible for entry of competitors in the services offered by KTDA.

“This should also be benchmarked with the privatisation of the power sector, which led to separation of generation, transmission and distribution functions that were all once handled by Kenya Power and Lighting Company,” said Deloitte.

Players at the Mombasa Tea Auction are also accused of colluding to fix prices, thereby denying small-scale farmers their deserved earnings.

Tea prices dropped to a record six-year low last year.

The weekly auction is the main outlet for Kenyan tea and was found to be in the hands of only a few buyers. Some regulations of the tea traders association were said to hinder competition.

“The number of brokers is capped at 12, the fee charged is fixed at 0.5 per cent of the auction volumes while producers cannot become brokers,” noted the report.

Mombasa is the largest tea auction in the world yet  it has only 52 active buyers-cum-exporters.  The licensed dealers are 71 compared with Sri Lanka’s Colombo market, the second largest globally, that has over 400 buyers.

There are 11 brokers at the Mombasa auction, an exclusive group with its own guide book, which spells out the rules and regulations governing the tea sale conducted on Monday and Tuesday every week.

“Information is shared with East African Tea Trade Association trading members but little information is shared with producer members from the auction. There is need to invest in an electronic auction to be able to follow up on the bids offered as a source of information when monitoring performance,” said Deloitte.

ZERO BENEFITS

Last year, The Tea Industry Status report said key players, among them KTDA, were colluding to deny small-scale farmers their rightful earnings from the auction.

The report also blamed direct sales outside auction venues to some big marketers for creating a huge price difference while giving the impression that there is excess tea in the market. Price manipulation is said to have been rampant in March and April 2014.

“Smallholder farmers are normally paid the hammer price, with zero benefits from this venture. Prices have continued to decline, not because of poor quality of the green leaf but due to distorted trade practices,” said Tea Industry Status report for 2014.

Selling tea outside auction venues to some big marketers is also a common practice by KTDA’s subsidiary — Chai Trading.

Known as the post-auction/private sale of withdrawn teas, private deals are struck to buy high quality teas at below auction prices.

Kenya is the world’s leading exporter of black tea. The crop is a major foreign exchange earner for the country, which has approximately 560,000 registered growers. Nearly 70 per cent of the product offered at the Mombasa auction is from Kenya although Uganda, Tanzania, Rwanda, Burundi and other regional producers sell their produce at the venue.

Buyers from Pakistan, Egypt, United Kingdom, Sudan and the United Arab Emirates are the major clients.

KENYA'S TEA CUP

What Deloitte study found out 

•  The tea industry in Kenya is run under a weak regulatory framework, it lacks national policy to guide on legislation and regulation of the industry.

•  The Kenya Tea Development Agency, a green leaf marketer, is part of the industry regulator — the Tea Board of Kenya. This means that the agency has the capacity to use its position at the board to access insider information and use it to have an advantage over competitors.

•  After KTDA was privatised and its name changed from Kenya Tea Development Authority in 2000, Deloitte established, an uncompetitive environment has guaranteed the agency control of the small tea factories across the country.

•  KTDA has lost focus and “adopted an unclear mandate” to the detriment of millions of farmers.

• Recommendation

•  The government should review liberalisation of the tea sector by benchmarking it with the privatisation of the power industry, which saw the split of electricity generation from the distribution arms.