Revival of State-owned trade agency has firms on edge

A Ukrainian vessel offloads wheat donation to Kenya in November last year. Kenya National Trading Corporation will distribute the wheat on behalf of the government. [Omondi Onyango, Standard]

Until recently, the Kenya National Trading Corporation (KNTC) passed for another nondescript State agency, a parastatal whose best days were possibly in the past.

In its glory days, the State-owned trading agency was the sole wholesaler and distributor of salt, sugar, cement, bicycles and other products. Its monopoly was, however, broken with the liberalisation of the economy in the early 1990s.

It only came to the fore recently when the Ministry of Investments, Trade and Industry started implementing a Cabinet-sanctioned plan to lower the cost of living.

The agency, according to the Cabinet, will be "the anchor of State initiatives to create price stabilisation for household food items".

And just a few months after the Cabinet agreed that KNTC should be the price stabiliser for essential commodities in November last year, it has already gotten a waiver to import about 600,000 tonnes of food items duty-free.

The Trade Ministry has been negotiating financing for the agency, with the Cabinet approving a request by the Ministry to give KNTC the leeway to borrow up to Sh20 billion.

The Africa Export-Import (Afrexim) Bank is among the institutions that will advance credit to KNTC, which emerged earlier this month when the ministry held talks with the leadership of the Pan-African development finance institution.

The food items include 125,000 tonnes of edible oil, 200,000 tonnes of sugar, 150,000 tonnes of rice, 25,000 tonnes of wheat and 80,000 tonnes of beans.

KNTC will also deliver the 25,000 tonnes of wheat the crisis-hit Ukraine donated to Kenya to help the country fight the impact of the prolonged drought.

"The (Customs and Border Control) Department shall facilitate the duty-free importation... the approval is effective January 20, 2023, for a period of one year. Implication therein is that the import window shall lapse immediately the quota is exhausted or on January 19, 2024, whichever is earlier," said KRA in a February 14 letter, approving a January 27 request by the National Treasury to allow KNTC to import the food items duty-free.

CS Ministry of Investments, Trade and Industry, Moses Kuria. [File, Standard]

This could give KNTC back the shine it had in the 1970s and 1980s. The huge quantities of the food items, backed by the preferential tax regime would put the agency ahead of many local firms producing or importing finished products.

Edible fats

The new development has, however, not sat well with manufacturers who have written to the Trade Cabinet Secretary Trade, protesting the move.

"If you take the 125,000 tonnes of edible fats and oil that KNTC will import and compare it to the local demand of about 655,000 tonnes, it would be the same as a new player coming in and immediately getting a market share of about 20 per cent. That is more than many companies that have been in the market for years," said a manufacturer who spoke anonymously for fear of being victimised for speaking against the State policy shift.

"The new player, which in this case is KNTC, has the advantage of not paying import duty, which might mean that if it sells the cooking oil at market rates, it will make huge profit margins. If it passes the benefits to consumers, which is the intention, according to the government, the product will be substantially lower than the market rates and will have a major impact on the manufacturing industry... think players selling products below cost," said the industry player.

"It will cause major disruptions not just to the manufacturing industry but also sectors such as retail given that KNTC reaches many parts of the country." There are also concerns that Kenya may run afoul of the East Africa Community (EAC) laws that require any country importing duty-free essential items to file notices with the regional trading bloc. Kenya has apparently not filed notices for some of the items.

"EAC might reject products coming from Kenya without proper notice. The certificates of origin will be rejected. The downside of this is that it will cause jitters among EAC partner States, and there are already reports of an unofficial directive by one of the EAC countries to subject all Kenyan products to unnecessary scrutiny," said the manufacturer.

There are also concerns as to why KNTC has not procured the items as required by the law and whether the Cabinet approvals exempt it from the requirements of the Public Procurement and Disposal Act (PPDA).

"Has KNTC issued a public tender in procuring these items as required by PPDA? Why not give priority to local industries to supply duty-free commodities that are readily available?" posed the manufacturer.

Other than the concerns of the manufacturers losing a share of their business to KNTC, the shaky times that the agency has endured since it lost its monopoly could also be a concern. KNTC has been in the doldrums and only recently emerged from loss-making to report a net profit of Sh1.91 million in the year to June 2020 from a loss of Sh16.83 million in 2019, according to the agency's latest available annual report.

The agency has been implementing a turnaround plan that appears to have borne fruits since it lost its monopoly. At some point, its performance was so bad that in May 2004, the Cabinet gave an order that KNTC be wound up due to years of loss-making.

The Cabinet would, however, rescind the order in 2009 and instead agreed to restructure it while giving it an expanded mandate of growing its role in the retail and wholesale sectors, which were identified as some of the key pillars of the country's Vision 2030 economic blueprint.

Auditor-General Nancy Gantungu. [File, Standard]

An audit report by the Auditor General shows an agency that has poor controls, is unable to collect cash from its customers as well as secure its assets besides losing some of its parcels to land grabbers. The audit also shows how easy it is to gain access to its ICT systems.

Audit opinion

Auditor General Nancy Gantungu gave KNTC a qualified audit opinion, an indication that there may be misstatements in the agency's accounts over the year to June 2020.

Among issues that piqued the Auditor General's interest and formed the basis of the qualified opinion was the failure by KNTC to collect overdue debts as well as the manner in which it has been handling some of its assets, failing to secure parcels of land by acquiring necessary title deeds.

Ms Gathungu identified a parcel of land in Nakuru that has already been grabbed and the title deed put in the name of an individual citizen. The company's trade and other receivables - which are debts by its customers and tenants - nearly doubled over the year to June 2020.

According to its accounts, these debts increased to Sh197.19 million, a growth of Sh89.77 million or 83.5 per cent from the previous year's Sh107.42 million. Among the biggest debtors are the government, whose debt to KNTC jumped to Sh26 million over the year from Sh13 million.

Companies or individuals that KNTC classified as "private debtors" owed it Sh25 million, which was largely unchanged during the year. Companies that have in the past leased their facilities owed the agency Sh87 million, with Uchumi being among the biggest defaulters on rent at Sh44.73 million.

The largest debtors are, however, what KNTC has classified as rice debtors, who owe it Sh78.8 million as of June 2020. The agency usually supplies disciplined forces, government institutions as well as the general public with rice bought from local farmers.

Since January 2020, when a presidential directive was issued for KNTC to mop up locally grown rice for distribution, the agency says it has procured and distributed Kenyan-grown rice worth more than Sh2.4 billion. It appears that the institutions have been slow in paying for the rice received from KNTC.

"The continued accumulation of outstanding receivables is an indication of weakness in debt collection mechanisms in the recovery of outstanding amounts due to the corporation," said the Auditor General.