Rethink fertiliser subsidy model

Workers arrange bags of subsidised fertilizer at the National Cereals and Produce Board depot in Elburgon, Nakuru County. FILE PHOTO | JOHN NJOROGE | NMG

Welcome to the high-octane struggles that happen behind the scenes in the fertiliser business in Kenya. The abrupt exit, the other day, of the chairman of the Kenya Tea Development Agency (KTDA) David Ichoho happened against the background of a vicious war over the lucrative fertiliser contract the agency floats yearly.

Indeed, the KTDA fertiliser deal is the single largest in the country. Mr Ichoho found himself on the wrong side of the divide.

I am not opposing the government fertiliser subsidy plan. My view is that the government should open it up to all private sector players. When you single-source the massive contract to only two players, you will have opened the window for corruption and rent-seeking.

Within sub-Sahara, Kenya’s fertiliser private sector market is among the most developed. The private sector has well-capitalised importers and manufacturers that have developed well-established supply chains with global producers and shippers.

The sector has access to financing and a range of fertiliser business models. It is estimated that private sector investment in the business is at $90 million (Sh13.5 billion).

This is when you calculate the value-added activity in manufacturing, blending and granulation plants all over the country. The private sector has also invested in extensive distribution networks throughout the country.

The government fertiliser programme has literally administered euthanasia to the private sector companies. According to a recent study conducted by Tegemeo Institute — the respected think tank on agricultural policy— the volumes of fertiliser handled by private stockists and other last mile agro-dealers fell by 88 percent last year as a result of the impact of the government subsidy programme.

Clearly, the signs are that the subsidies are driving out last mile agro-dealers out of business for both farming inputs and other value adds such as extension services.

I agree that cushioning farmers against skyrocketing fertiliser prices makes sense, but it should not crowd out private sector investment in the sector.

The government decided to develop its own value chain, introduce the Kenya National Trading Corporation into the space as a new implementing partner and to ignore international competitive bidding.

I recently heard that a major Eldoret-based player is contemplating shutting its operations.

In a sense, what is happening in the fertiliser market is symptomatic of a new trend towards policy bias against the private sector. Are we, really, bothered about declining profitability of companies in this economy? Who is bothered that most companies have literally frozen expansion?

Who cares that a good number of companies have been forced into situations where they would rather postpone remitting taxes and use the cash for funding operations?

The biggest flaw in the new trends in economic policy is failure to prioritise expansion of private sector investment as a top national priority.

As a society, we are beginning to put a higher premium on public investment and behave as if we have forgotten that the priority of priorities today is how to reinvigorate private sector investment and growth.

Our manufacturing sector is losing its dominance as a net exporter of goods and services in the region. Policy is obsessed with collecting more taxes.

At a private briefing by one of the administration’s top economic advisers recently, I was astonished at the notion that Kenya’s biggest problem was that we were not collecting enough taxes.

The man challenged us to compare the number of businesses with M-Pesa till numbers (nearly 800,000) with those registered for VAT (just under 250,000).

He asked us whether we have ever wondered why tax authorities in both Uganda and Tanzania sell more tax stamps than us.

Yet the reason revenue growth has stagnated is sluggish and anaemic economic growth. How can we collect more taxes in the context of an upsurge of listed companies issuing profit warnings? Even though we have witnessed an exponential growth in electricity connections, we have not seen an exponential increase in electricity consumption.

Expansion of private sector investment is the only sound basis for improving living standards. The government must rethink the model for implementing the fertiliser subsidy.