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Tax proposal that could hit pockets of KFC food lovers

FINANCIAL STANDARD
By Dominic Omondi | Apr 12th 2022 | 4 min read
By Dominic Omondi | April 12th 2022
FINANCIAL STANDARD
A KFC outlet in Westlands, Nairobi. The fast-food chain sources potatoes from Egypt and South Africa. [Elvis Ogina, Standard]

The price of French fries sold by the Kenyan franchise of American fast-food chain, Kentucky Fried Chicken (KFC), could go up after the government proposed to introduce excise duty on the variety of potatoes the restaurant imports.

In the Finance Bill, 2022, the National Treasury has proposed 25 per cent excise duty, or sin tax, on all imported potatoes, including the pre-blanched, blast-frozen French fries that KFC sources from Egypt, South Africa and the United Arab Emirates.

This is likely to push KFC to source its potatoes locally or raise the price of fries after factoring in the new excise duty on its imported tuber.  

In January, an announcement by KFC that it had run out of fries raised a storm as it came at a time when local farmers were grappling with an oversupply of potatoes. This is a departure from the move taken last year when the National Treasury Cabinet Secretary, Mr Ukur Yatani, slapped imported potatoes with a higher import duty instead of excise duty.

However, higher import duty was not going to affect KFC’s imports because some of the fast-food franchises get most of their potatoes from Egypt, which enjoys preferential treatment under Common Market for Eastern and Southern Africa (Comesa) rules. Kenya is also a member of Comesa.

In what was aimed at protecting growers of vegetable products, including potatoes, peas, and tomatoes, the finance ministers of the three East African Community (EAC) partner states agreed to increase import duty on these products.

“To protect these farmers and the sector from cheap imports, the EAC partner States agreed that vegetable products, including potatoes, peas and tomatoes, among others, shall attract a duty rate of 30 per cent for one year as we await the finalisation of the review of the EAC Common External Tariff,” said Mr Yatani last year.

KFC imports processed, pre-blanched, blast-frozen potato French fries. [File, Standard]

However, this will not restrict the flow of these vegetables from Egypt where fast-food franchises get most of their potatoes. Kenya also imports some of its potatoes from Uganda. And with the two countries being members of the EAC, they have a common external tariff.

The value of imported potatoes - frozen, uncooked steamed or boiled - is almost negligible. In 2020, figures from the Observatory of Economic Complexity (OEC), a leading data visualisation tool for international trade data, showed that the country imported $44,100 (Sh5.1 million) worth of potatoes.

The lack of a legal framework is the main reason why KFC continues to import potatoes from Egypt and South Africa. KFC set up its first outlet in Kenya in 2011, noting that it would be sourcing its potatoes from Egypt because Kenya did not have the quality control standards KFC demanded. 

Potato farmers

It was not until 2019 that Parliament came up with the Crops (Irish Potato) Regulations that demanded, among other requirements, the registration of all potato farmers. 

Another study conducted in 2014 by the National Potato Council found that only 25 per cent of potato processors had some form of traceability, which was limited to the capacity to track suppliers. 

“The limited traceability is attributed to lack of a suitable legal framework that provides for mandatory registration of all potato dealers and integration of information system among the relevant regulatory agencies,” noted the National Potato Council report.

KFC imports processed, pre-blanched, blast-frozen potato French fries from Egypt and South Africa because it has total traceability back to the source. This is critical in case of any health and safety issues. Another problem that has hampered the entry of Kenyan farmers into the supply chain of these global food giants is the lack of certified seeds.

Local producers are expected to start supplying the KFC with potatoes by the end of this year. [File, Standard]

“Only five per cent of varieties from Kalro (Kenya Agriculture and Livestock Research Organisation) and Kephis (Kenya Plant Health Inspectorate Service) are suitable for processing, yet Kalro does not have the capacity to multiply enough seeds of these top varieties, even when operating at full capacity,” said the World Bank.

“Indeed, Kenyan processors supplying frozen chips to high-end hospitality chains are importing potatoes from these two countries – locking out local farmers from this high-value industry.” 

One other fast-food company that had been reluctant to enter Kenya due to the lack of a proper supply chain is America’s Burger King. 

Increased potatoes production is part of President Uhuru Kenyatta’s plan to ensure food security under the Big Four agenda.

The plan is for the country to increase production from the current 1.6 million tonnes to about 2.5 tonnes by the end of this year. 

KFC has since agreed with Kenyan authorities on how it will be sourcing its potatoes locally.

Local producers, however, are expected to start supplying the American restaurant chain with potatoes by the end of this year after it held talks with the Nyandarua County Government and KFC on finding ways through which it can work with farmers through cooperatives or organised youth groups. 

This will be in strict compliance with the internationally set standards that will see the franchise maintain its quality, while farmers improve on their farming and storage practices.

The local potato sector is valued at Sh50 billion, with the crop grown in more than 16 counties. 

The industry has been grappling with a lack of certified seeds, poor distribution channels, lack of a market, expensive inputs, such as pesticides, and a lack of cold storage facilities. 

And because the production of potatoes is rain-fed, everyone plants and harvests at the same time, thus the susceptibility to cycles of boom and bust.

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