We must jealously guard tea sector’s role in economy

Kenya Tea Development Agency Group CEO Lerionka Tiampati. He insists that Kenya must jealously guard sector’s role in economy. (PHOTO: WILBERFORCE OKWIRI/ STANDARD)

What is the structure of the smallholder sub-sector of the tea industry?

Tea farmers are the owners of the land on which they farm tea. They are also the shareholders of the tea processing factory, to which they contribute equity for its construction and operation.

The tea factory companies are in turn the corporate shareholders of KTDA Holdings through equity contributions for its operation.

Each tea factory is a limited liability company registered under the Companies Act of the laws of Kenya. As such, it is operated independently of other factory companies, and has its own board of directors and management. It produces and sells its own tea, manages its own cost of operations, operates its own bank accounts and produces its own financial statements.

These statements are subject to audits by external auditors appointed by the shareholders.

A factory’s ongoing projects, new projects and how they are funded are determined by its board of directors, in consultation with the managing agent and shareholders.

The notion that there is a pool of money from which earnings are shared between factories is, therefore, not true. Each factory earns its own revenues, incurs its own costs and declares its own payment to its farmers based on its market performance.

KTDA Holdings has set up or invested in seven subsidiary companies along the tea value chain. These companies provide various services to the group to reduce costs, improve efficiency, earn revenue or provide corporate social responsibility services for the benefit of the ultimate shareholder — the tea farmer.

One of the subsidiary companies of the holding company, KTDA Management Services Ltd, provides management services to tea factory companies under its management. This is done through agreements.

All of these companies are profit centres and operate at arm’s length with each other.

Placed in the Kenyan context, this is a very large, complex group whose combined turnover is over $1 billion (Sh100 billion). It directly employs more than 10,000 staff across the group, and provides a livelihood for more than 650,000 farmers, and indirectly to over five million Kenyans.

It accounts for 60 per cent of Kenya’s tea production, 2.5 per cent of our GDP, and over 15 per cent of global tea exports, providing tea for blending to many tea packers across the world, including Pakistan, Egypt, United Kingdom, Afghanistan, Sudan, Russia, Iran and the US.

This entire structure is owned and managed by the shareholders (farmers) through an elaborate governance structure, right from buying centres to tea factory companies to KTDA Holdings and its subsidiaries. Farmers elect their representatives every year at these levels.

There are not many such successful smallholder farmer-owned and farmer-led models in Africa or elsewhere in the world.

A few such models exist for kiwi fruit and dairy production in New Zealand. Holland also boasts of such models in financial services and dairy production, while Columbia has such a model for coffee. Ours is the only successful model for tea so far, something we should be proud of and continue to support to grow to even higher levels for the benefit of our farmers.

The second payment (bonus) and how it is derived:

Having understood the above structure, the second payment is declared by respective tea factory companies at the end of every financial year ending June 30.

Each factory company produces and sells a certain volume of made tea based on its installed capacity. About 95 per cent of the tea is exported and bought mainly by international buyers through the Mombasa auction or directly from factory companies.

There are four main and three secondary grades of CTC [cut, tear and curl] teas produced by each factory company, each serving specific markets and each fetching different prices, thus making the tea business very unique – much like the wine business.

Different buyers have specific preferences for specific grades of factory teas based on consumer preferences in their markets of operation. The buyers pay a specific price in dollars based on their market requirements and perceived value of the various grades of tea they require for their blends.

Price is the key determinant of the revenue earned and the final payment made to tea farmers.

The earned dollars are converted to shillings at the prevailing exchange rate, and invested in interest-earning accounts with commercial banks.

This occurs at different times and at different rates, depending on the prevailing interest rates in the market and amount of funds available for investment.

The price realised, volume of the made tea sold, as well as interest earnings are, therefore, the major contributors to the total revenues made by individual factory companies.

On the operating expenses side, the key cost drivers are labour, electricity, wood fuel, financing costs (interest on loans and depreciation), administrative costs and other expenses incurred in the ordinary course of business.

There are factory companies with no loans to service at all and yet others have heavy loan obligations, as they have newly constructed factories or expansions to enhance processing capacities, mini-hydro projects or wood fuel plantation projects. The cost and availability of wood fuel, which is a major input cost in factory operations, differs greatly from factory to factory.

With these in mind, it is therefore clear that it is not practically possible to pay a uniform rate across all factory companies, as each factory is a limited liability company operating independently.

In the just-ended financial year, average costs stood at an average of 25 per cent of the total income generated by the factories.

Thus, farmers will be paid an average of 75 per cent of the income, which works out to a total payment of Sh61.99 billion, a 43 per cent increase from the previous year.

This is the best performance we have achieved so far in the history of the smallholder tea sub-sector.

The current business model for smallholder tea farmers in Kenya is an international case study on how to empower smallholder farmers to successfully govern and manage their own affairs. This very successful model should be jealously safeguarded in the interest of Kenyan tea farmers.

What do you think fuelled the dissatisfaction with the payout, particularly in Thumaita, Gianchore and Tombe tea factories?

There were false final payment figures circulating on social media in July this year purporting to be this year’s bonus. This misinformation fuelled the events that took place in these factories.

There is normally intense competition between factory companies in the same zones. We have been informed that some farmers were unhappy with their individual factory positions in their zones, while others were incited by individuals desirous of wrecking our otherwise successful tea business.

It is difficult to understand what they would gain by destroying a very successful farmer enterprise.