Tea barons and brokers know there is money in the multimillion shilling private sales — a legal but back-door deal that allows smallholder farmers’ produce to be sold without going through the normal Mombasa auction.
Inside KTDA, the splitting of invoices is a common practice and tea farmers have lost huge amounts of money as a result. This is usually done by the marketing department in respect of teas consigned for sale.
Private sales were originally supposed to be an avenue for obtaining better prices.
The Nation has established that tea brokers are usually instructed to sell only a portion of the consigned teas to the auction and the balance through private treaty.
It is a practice that was once detected during the 2000 Leakey Audit of KTDA which also accused the KTDA marketing department of holding some factory teas for too long and then sell it as “old teas… (or as) forgotten in the warehouses.”
“Another loophole through which larger losses are incurred is in the practice whereby invoices with excess weight are sold privately through brokers, ostensibly because excess weight is not recognised at the auction,” the Leakey audit report had noted.
When Richard Leakey was appointed the Head of Civil Service and Secretary to the Cabinet, he started an operation that would have rectified the wrongs in the tea industry.
The KTDA audit, which he commissioned, revealed major operational loopholes and wanton waste of farmers’ income but Dr Leakey quit in March 2001 — just a year after the publication of the report and the structural reforms he had in mind never materialised to the chagrin of farmers.
The same practice featured in a Tea Board of Kenya Status Report for 2014 which accused various players, chief among them the Kenya Tea Development Agency (KTDA), of manipulating the price of the highest tea grade, PF1.
“The current low prices at the auction are precipitated by some unorthodox practices by KTDA, which controls over 65 per cent of the volumes dealt in at the auction. This is done in collusion with major brokers, warehouses and traders. The perpetrators continually divert attention from the real issues by citing the ad-valorem levy,” the report says.
With the opening of private sales, farmers cannot get the true value of their produce according to insiders privy to the tea trade.
The diversion of tea from the auction to private sales is today the main conduit through which farmers lose a lot of money — and factories have no say on this either.
“Any broker who does not play ball exposes themselves to the danger of not being allocated sufficient teas for either auctioning or private selling. In other words, the sales and marketing department can perpetrate the collapse of a brokerage firm that does not cooperate,” said the Leakey report tabled in Parliament in 2000. Some 19 years later, nothing has changed — and KTDA has not been interested in stopping the practice.
Instead its own subsidiary, Chai Trading, has been the king of this unorthodox practice. It has also opened an office in Dubai’s emerging auction centre, Dubai Multi Commodities Centre (DMCC) located at the largest free zone in UAE.
This opaque practice, which no farmer is informed about, marks the beginning of a rip-off since farmers are left at the mercy of brokers and barons. The later only interested in buying tea at a cheap price.
Although there is no limit on the amount of tea that can be sold at the auction, brokers appointed by farmers to sell their tea have been opting for private sale rather than the auction, and for a reason.
This way, according to insiders, farmers lose millions of shillings through the connivance of brokers and buyers.
At the auction, it is the tea brokers — appointed by the factories — who prepare the selling catalogue which gives specific information on the grade and taste. The auction is conducted in public and buyers compete for the tea by bidding against each other at the auction room. The teas are supposed to be sold in grades and under various factory names and buyers are usually given samples in advance to judge the quality. It is the broker who sets the minimum price for a particular lot. This practice, now a norm perpetuated by KTDA, has been making the auction unattractive to some buyers and farmers have no say on how their tea should be sold. At worst, they have no idea how their tea is sold — or how the prices are arrived at.
While the purpose of an auction – done on Monday and Tuesday - is to get a barometer on the prices, some brokers have been withdrawing tea from the auction in order to sell it privately. It is the KTDA marketing department which goes to these buyers and offers to sell the tea privately. The Dubai office was started for scouting such buyers.
“Tea is not left at the auction because there is no demand. It is left because KTDA has offered a cheaper price,” says an insider.
More so, KTDA offers credit of between 30 and 120 days to these foreign companies. As a result, a buyer will opt to buy tea from KTDA rather than go through the brokers. This is because KTDA is also the appointed agency of the factories and still can sell the tea privately. Such deals are brokered at the Dubai-based office where most of the global merchants congregate at the expansive Dubai Multi Commodities Centre (DMCC) Tea Centre. So big is the trading house in Dubai that DMCC claims on its website that re-exports DMCC “now accounts for 60 percent of global tea re-exports.”
In order to do this, KTDA formed Chai trading company – which is akin to a buyer company. This company is given tea by KTDA marketing and for 30 days; which means that KTDA trades with farmers’ tea – or rather it gives barons farmers’ tea to sell and make profit.
“They do what they want with farmers’ tea,” says an insider.
The company had at one point bought a huge consignment of tea from Vietnam. “It is like having a shop and buying from another shop.”
It is estimated that KTDA sells 40 per cent of its tea privately and 60 per cent through auction.
While the founding of KTDA was to help the farmers, its subsidiaries are now doing the reverse and smallholder farmers have nobody to speak for them. The only body so far registered by the Tea Board of Kenya is KTDA Management Limited – while the others operate without approval.
After getting paid by the buyers, KTDA retains 40 per cent per cent of the earnings and gives farmers the balance — less other deductions that include cess tax, fertiliser, and many others.
So careless has been KTDA that when Imperial Bank collapsed, it went down with Sh3 billions of farmers’ money, while Chase Bank went down with Sh5.5 billion.
That means that in total tea farmers lost Sh8.5 billion. That KTDA has become the saviour of struggling banks is now known and this money is usually put in fixed accounts.
But KTDA pays farmers Sh14 per kilo per month while the rest of the money – deposited in various banks – is paid at the end of the year. Farmers are usually told it is “bonus” rather than second payment.
In order to “help” these farmers, after keeping their money, KTDA has in turned formed Greenland Fedha Limited where the farmers take advance payments of their money and pay with interest. Its directors are also the directors of KTDA Holdings and other subsidiaries and include chairman Peter Kanyago and CEO Lerionka Tiampati ,among others.
It has become popular with farmers who take as little as Sh500 as loan.
The impact of this is seen in rural areas where farmers are selling tea leaves at the farm gate rather than wait for payments after 12 months. But also, private factories have invaded zones hitherto set aside for various factories and are buying tea leaves from the farmers.
For instance, in Kiharu constituency, Ngorongo Tea Factory Limited, associated with three central Kenya barons — the late Njenga Karume, Charles Kibe Karanja and Jackson Kamau — has become the king of farm gate and has invaded zones operated by Githambo Tea Factory.
While the Mombasa Tea Auction serves as a regional auction centre for the tea producing countries namely; Uganda, Tanzania, Rwanda, Burundi, Congo and Malawi thereby positioning Kenya as a major tea trade centre, it now appears that chances of Kenya becoming a regional tea powerhouse is evaporating as farmers are left the mercy of a rogue KTDA.
The activities of Dubai’s DTTC have attracted business away from Mombasa, with major players such as Unilever, James Finlay and even KTDA signing up to trade pacts with DTTC.
East African Tea Trade Association insiders argue that the reduction of buyers in the auction will ultimately reduce competition and lead to price crash.