Kenya Value Chain and Competitiveness Analysis … Desk Study...Kenya Value Chain and Competitiveness Analysis Volume 1: Market Analysis Global Development Solutions, LLC 3 Table of

Kenya Value Chain and Competitiveness Analysis

Volume 1: Market Analysis

Prepared for

The World Bank

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Global Development Solutions, LLC

August 2004

Kenya Value Chain and Competitiveness Analysis Volume 1: Market Analysis

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Table of Content A. Background 4 B. The Physical Context of Kenya 4

B.1 Geography 4 B.2 Kenya and Its Neighbors 5

C. Economy 6 C.1 Labour Force and Employment 7 C.2 Productivity, Wages and Incomes 8 C.3 Exports 11 D. Market Study Structure 12 D.1 Kenya Tea Sector 12 D.2 Coffee Sector 24 D.3 Horticulture Sector 30 D.3.a Cut Flowers 36 D.3.b Vegetables 39 D.3.c Fruit 40 D.4 Textiles Sector 40 D.4.a Cotton Sector 42 D.4.b Wool Production 43 D.5 Garments Sector 44 E. Infrastructure Factors 46 E.1 Finance and Access to Capital 46 E.2 Transport 46 E.3 Regulations and Licensing 47 E.4 Insurance in the Kenyan Market 47



1

Market Analysis A. Background

This Kenya Market Analysis is a desk study focused on three key sectors and their products. It is based on data aggregated from a number of sources1. The study describes the products both in the context of the Kenyan economy as well as international demand. It provides information on Kenya’s primary export markets and most promising opportunities for development of domestic support industries for the goods and services needed to improve the terms of trade for exports. It outlines approaches to integrate specific sectors of the Kenya economy more tightly into a larger regional and international supply chain. This study’s examination of export

1 Data Sources consulted include, among others: Tea Board of Kenya; Central Bank of Kenya; FAO; ILO; The World Bank; UNDP, UNICEF; Central Organisation of Trade Unions, Kenya; Republic of Kenya Department Plan 1994 – 6; and U.S. Government

potential is important for two reasons. The first is that it can help to highlight the impediments in the supply chain that constrain Kenya’s ability to maximize its export potential of the selected products and/or higher value-added products within the selected product group. The second is that it can help to discover how the Kenya economy can diversify into additional growth sectors through export or development of support industries for existing industry clusters, B. The Physical Context of Kenya B.1. Geography

Kenya is a constitutional republic located on the east coast of Africa. Kenya has an

area of approximately 225,000 sq. miles/583,000 sq. km that comprise four climatic regions. In the coastal regions, the climate is tropical, hot and humid. The plateau and the highlands regions are more temperate. The northern frontier districts are largely arid and unpopulated. The area with the highest earthquake



potential is the Great Rift Valley and regions around Lake Victoria near the Ugandan border are the most exposed to flooding due to their flat topography, particularly in the rainy seasons. Kenya is a multi-ethnic nation of approximately 31,000,000 population. Its administrative arrangements closely parallel ethnic boundaries. The largest ethnic groups are the Kikuyu, Luhya, Luo, Kamba, and Kalenjin. After recent elections, Kenya is beginning a process of shedding its history of parastatal ownership of production, processing and trading. Additionally, the Kenyan press has enjoyed a more open and less oppressive period after the recent elections. Signs of a movement to assert the right to self-expression and criticism of government actions in political and cultural channels2 may be indicative also of a rebirth of entrepreneurial spirit. B.2. Kenya and its Neighbors Kenya is bordered by Tanzania on the south, Uganda to the West, and Sudan,

Ethiopia and Somalia to the north. Nairobi lies at the crossroads of an east-

2 The Washington Post, October 13, 2003, “Kenyan Writers Turn the Page of the Past; first literary magazine is sign of new freedoms.” By Emily Wax

west highway and railroad linking the Indian Ocean coastal port of Mombasa with Kampala, Uganda, and a north-south highway between Tanzania and Ethiopia. Kenya’s economic prosperity is linked to that of its primary regional trading partners, Uganda and Tanzania. Sudan is a buyer of Kenyan tea. There is additional unofficial and illegal trade with ad hoc buyers in Somalia. One Kenyan observer noted in a preview of 2003 that, “Despite our grinding poverty, Kenya is the economic powerhouse in the region and unfortunately our neighbours will continue to be suspicious of us, so progress may still be slow. Still, the regional export market, already our biggest market, will also be our biggest growth market.”3 A Kenyan representative to an AGOA meeting in Mauritius early in 2003 also reflected on his vision for a possible economic integration of the East African Community: ”I also see a huge potential of economic integration if quality cotton from Tanzania is taken for milling in Uganda to be made available to textile manufacturers in Kenya.”4 Whether there is appetite among the East African countries for the exported finished goods of its neighbors remains to be seen. If not, then buyers will have to be found further afield: in South Asia, Europe, and the U.S.

3 The Nation, Monday, December 30, 2002, “Yes, Change Will Come in 2003, But Slowly...”, by Joe Gichuki, manager, business development services department, at Deloitte and Touche, Nairobi 4 The Nation, February 3, 2003, “Let’s Have Cotton Grown in Tanzania, Milled in Uganda, Made in Kenya”, by Dr. Mukhisa Kituyi, Minister for Trade and Industry, Kenya



C. ECONOMY

Kenya’s economy has been based on agriculture for many decades. After enjoying economic growth from independence in 1963 until the 1970s, in the 1980s and 1990s, Kenya saw its economy decline, living standards fall, and the quality of its institutions deteriorate. The average GDP growth rate declined from 6.5% between the 1960s and the 1970s to about 2.2% in 1990–2001, which is below the average population growth rate of 2.5%. Gross domestic investment fell from 20% in the early 1990s to about 13% in 2001. Virtually all the decline occurred in public sector investment—from about 10% of

GDP in the early part of the 1990s. Public sector gross capital formation fell to just over 4% of GDP in 2001. In 2002, the rate of growth of the Kenya economy declined slightly to 1.1% compared to 1.2% in the year 2001, according to this year's Economic Survey. The performance reflects conditions in the agricultural sector, the economy's mainstay. According to the Survey, agricultural output recorded 0.7% growth compared to 1.3% in 2001. Output of all major commodities declined sharply in the year, with production of the staple food, maize- dropping by 4 million bags over the figure for 2001.

Table 1- Kenya: Economic Measures

Measure 1998 2001 2002 Population growth (annual %) 2.4 2.0 1.8 GDP growth (annual %) 1.6 1.1 1.8 GDP implicit price deflator (annual % growth) 9.1 11.3 4.9 Value added in agriculture (% of GDP) 26.5 19 19.1 Value added in industry (% of GDP) 16.5 18.2 18.3 Value added in services (% of GDP) 57.1 62.9 62.6 Exports of goods and services (% of GDP) 24.9 26 25.5 Imports of goods and services (% of GDP) 32.7 34.6 31.6 Gross capital formation (% of GDP) 15.3 12.8 14.8 Source: World Development Indicators database, August 2003

The year 2003 marks a point of change in Kenya. After a confident beginning by the new NARC government, there have been high expectations for economic improvement. Those expectations may be too high, according to a recent assessment5. The Eastern Africa Association, one of the largest membership associations of businesses in the region, includes major European and

5 The Nation, Tuesday October 14, 2003, “Key business lobby paints grim picture for Kenya's economy,” By Jaindi Kisero

American multinationals. Its summary of Kenya describes, “...an economy with no cash, thus few customers, decline in business, hence no expansion or capital investment.” The report notes that the “private sector business is now not just concerned, but alarmed by the stagnant state of the economy." Some major manufacturers of consumer perishables have reported an unprecedented drop in sales. The withdrawal of major donors and investors from Kenya, begun in 2001, had not yet



ended. There has been virtually no new foreign investment. Kenyan Government procurement has been at a standstill. No orders have been placed and no debts paid for much of 2003. "There is simply no cash in the private sector economy, despite a surfeit of liquidity within banks", the report notes. Not all factors are subject to Kenyan policy or control, but some are. By sector, tourism, both foreign and domestic, has reached a desperate state. With the absence of donor funds, there have been no major construction projects or labor generating activity. The coffee and tea sectors are in decline. The coffee industry is losing money while tea plantations were all facing losses: not because the crop is poor but because world prices are low. Horticulture has been hit by labor unrest, it says. It adds that the volatility of the

Kenya Shilling, albeit for a short period, had serious repercussions for the exporting community. Kenya's economy is structured in such a way that the majority of employment (estimated at 60-80% of the population available for employment) depends on agriculture, while the agricultural sector contributed 30% of GDP in 2001 (by factor cost in 1995 constant prices). Industry contributed 15% of GDP, and Services 54.5% of GDP in 2001. As Table 2 depicts, however, the relative contribution of Agriculture to the economy has declined while that of Services has increased from 46% in 1980 to 54% in 2001. The contribution of the Industry’s manufacturing sub-sector has remained relatively flat: 9.3% in 1980 and 9.5% in 2001.

Table 2: Sectoral share in Kenyan GDP 1980 1985 1990 1995 2000 2001 GDP at factor cost (constant 1995 prices) US$Mln $4,518.94 $5,408.56 $6,894.60 $7,656.36 $8,444.07 $8,545.38 Agriculture 36.7% 35.7% 34.5% 31.1% 30.1% 30.1% Industry 17.2% 16.6% 16.6% 16.0% 15.5% 15.4% Services 46.0% 47.8% 48.9% 52.8% 54.4% 54.5% C.1. Labor Force and Employment Kenya has an estimated population of 31,300,000, an annual population growth of 2.1% and an annual employment growth of 1.8%. The average life expectancy is 46 years for males and 47 for females. Between 1986 and 1996, the average growth rate in the total available labor force was 4.1% per year. Yet,

employment increased only between 2 and 2.5% annually from 1986 to 1995. As a result, more than two million Kenyans were unemployed. Among those counted as employed, a significant proportion was underemployed, particularly those working in small-scale agriculture and the informal sector in both rural and urban areas. Average unemployment is estimated now at 23%.



Table 3: Kenya Population and Structure of Employment, 1995-2002

Figures x 1,000 1995 1996 1997 1998 1999 2000 2001 2002

Kenya Population 27,196 28,700 30,700 31,300

Total Labor Force 11,000 11,469 14,732.5 Total Employed 3,858.6 4,325.8 4,698.4 5,083.2 5,477.5 5,893.0 Nature of Employment Modern Establishment (Urban and rural areas wage employees) 1,557.0 1,618.8 1,647.4 1,664.9 1,673.6 1,676.8 Traditional Agriculture 6,124 Self- Employed and unpaid family workers 61.1 63.2 64.1 64.8 65.1 65.3 Informal Sector 1,140.5 2,643.9 2,986.9 3,353.5 3,738.8 4,150.9 Data Sources: Republic of Kenya Department Plan 1994 – 6; Kenya Economic Survey 2002; UNDP; ILO Small-scale agricultural absorbs 51% of the labor force. The informal sector is the next largest source of employment, followed by the urban formal sector. The greatest growth in employment has come in the urban informal sector. As part of public sector disinvestments, the public service has been reducing direct employment since 1993. In the year 2000 alone, about 50,000 civil servants were laid off. Average wage levels and benefits for public sector employees remain among the highest of wages in Kenya. Parastatal organizations have also provided less employment, either as a result of being disbanded or through shifts to the private sector. Kenya Railways fired more than 10,000 workers between 1999-2001 without paying terminal benefits. There are signs of some change, however. The African Growth and Opportunities Act (AGOA) enacted by the government of the United States has led to increases in employment, especially in the textile industry. From October 2000 to December 2001, two hundred thousands new jobs were credited to the effects of AGOA. In 2003, businesses taking advantage of the AGOA created 7,000 jobs.

On the other hand, the Kenya labor movement does not find that AGOA promotes quality employment but that conditions in AGOA industries resemble those in the export-processing zones (EPZ). In the first Quarter of 2003 there was industrial unrest in the EPZ’s, including complaints of poor working conditions and lack of trade union representation because of Government exemptions. The NARC government, which replaced the former KANU government in 2003, responded by revoking the previous exemption against unionisation. By end of March 2003 the Tailors and Textile Union had recruited 13,000 new members. The trade union’s main task was to draw up collective bargaining proposals. C.2. Productivity, Wages and Incomes In Kenya, the wealthiest 10% of the population receives 47%, while the poorest 20% receive 3.4% of GDP, which computes to a per capita annual income of US$260, or $0.70 per day. The GINI results are supported by estimates of absolute poverty, under $1 per day, affecting 60% of the population.



A Kenyan trade union economist recently noted that, “in the 1970s, the national poverty rate was 29%. Poverty has grown considerably in subsequent decades. A recent study shows that the level of absolute poverty has increased to about 52% in 1998. Between 1996 and 1999, the number of people living below the poverty line increased from about 11.5 million to an about 15 million. The twin problems now facing the Kenyan economy are poverty and a high level of unemployment. HIV/Aids, which now takes 710 lives per day, has further undermined productivity. HIV/Aids has very far-reaching repercussions for the economy since it affects the most productive age groups, especially 15 to 49 year olds. AIDS has also put great pressure on the government and the society at large in terms of caring for the sick, reduced productivity on the job, and the burden of caring for orphans.”6

6 “Highlights of Current Labor Market Conditions in Kenya”, By Noah Chanyisa Chune, Research Economist, Central Organisation of Trade Unions, Kenya, July 7, 2003



Table 4: Average Wage Earnings Per Employee, 1998 – 2002 (Ksh. Per annum)

1998 1999 2000 2001++ 2002* % chng

98-02 PRIVATE SECTOR Agriculture and forestry …………………… Mining and Quarrying ……………………… Manufacturing ………………………………… Electricity and Water ………………………. Building and Construction ………………… Trade, Restaurants and Hotels …………. Transport and Communications ……….. Finance, Insurance, Real Estate & Business Services …………………………… Community, Social & Personal Services

50,937.0 71,186.5 135,790.7 161,373.4 116,435.5 183,965.7 196,999.0 241,478.2 139,546.5

59,287.4 80,320.2 158,205.4 236,173.6 136,234.0 215,340.7 227,427.6 277,762.8 161,523.4

67,062.0 90,003.3 177,614.3 274,461.6 156,827.9 251,308.2 266,584.9 320,497.7 187,980.4

74,595.6 102,657.4 194,869.5 316,976.6 175,759.3 291,620.5 322,235.4 374,016.0 219,899.3

83,363.5 117,418.3 211,715.7 367,484.4 200,698.8 339,820.1 383,274.6 433,721.8 255,187.9

63.7 64.9 55.9 127.7 72.4 84.7 94.6 79.6 82.9

TOTAL PRIVATE SECTOR ………. 131,151.9 152,459.2 175,845.9 202,083.2 231,452.8 76.5 PUBLIC SECTOR Agriculture and Forestry ………………. Mining and Quarrying ………………….. Manufacturing …………………………….. Electricity and Water ……………………. Building and Construction …………….. Trade, Restaurants and Hotels ……… Transport and Communications …….. Finance, Insurance, Real Estate and Business Services …………………….. Community, Social & Personal Services.

74,566.6 122,997.2 94,750.6 154,091.6 108,631.8 153,094.1 157,607.3 290,389.7 134,743.4

85,628.7 133,654.9 106,592.3 175,692.4 124,530.3 171,760.7 180,017.5 334,888.9 148,773.5

102,187.0 151,277.8 124,847.2 209,572.9 148,239.7 200,684.8 215,425.5 401,016.4 168,009.3

119,596.3 168,080.9 143,866.1 245,501.9 173,508.6 230,178.1 255,709.7 469,769.6 191,118.3

139,848.3 185,705.7 167.050.5 285,888.9 202,858.6 309,234.3 305,480.3 579,043.9 218,002.1

87.5 50.9 76.3 85.5 86.7 101.9 93.8 99.4 61.8

TOTAL PUBLIC SECTOR 132,136.2 147,279.3 168,956.0 193,826.8 223,939.6 69.5 TOTAL PRIVATE & PUBLIC SECTOR 131,569.1 150,316.4 173,031.7 198,841.7 228,540.4 73.7 MEMORANDUM ITEMS IN PUBLIC SECTOR Central Government ……………………… Teachers Service Commission*** … Parastatal Bodies+ ……………………….. Majority control by the public Sector ++.. Local Government …………………………

114,068.5 146,080.0 127,946.0 164,978.0 125,338.0

119,036.6 151,006.0 170,018.0 198,802.0 154,035.6

121,047.6 155,916.0 227,433.7 299,774.0 186,302.8

135,863.5 163,661.2 274,790.0 361,596.0 219,702.0

142,766.0 190,653.4 334,419.4 438,977.5 255,293.7

25.2 30.5 161.4 166.1 103.7

TOTAL PUBLIC SECTOR ……………….. 132,136.2 147,279.3 168,956.0 193,826.8 223,939.6 69.5 * Provincial ** Refers to position as at 30 th June, figures have been annualised by multiplying by 12 for earnings. *** Refers to Government wholly-owned corporations + Refers to institutions where the Government has 51% or more shareholding but does not fully own them. ++ Revised. Healthcare, pension and unemployment costs borne by the labor force are significant and prevailing wages may not be sufficient to cover them. Basic healthcare is funded by the state. Treatment used to be completely free but now there is normally a charge. Private healthcare is greatly valued, but Kenyan insurers face two issues. The first is the low-income levels of most of the

population. The second is that the bulk of the private healthcare market is self-funded through company schemes. Those who are not employed by a company offering benefits, must self-fund an extended family’s healthcare costs from weekly wages. The negative effects of HIV/AIDS on family incomes cannot be overestimated.

There is no social security system in Kenya for unemployment benefit, disablement or sickness. There is however a compulsory National Social Security

Fund (NSSF) which provides a cash sum on retirement whether through old age or inability to work through sickness or disablement. There is no state-funded pension except for government



employees. Good employers supplement the state pension with their own and the company pensions market is undeveloped at present. Many employers offer group life schemes only, but the Retirement Benefits Act 1997 has yet to transform both the provision and control of occupational pensions. The wage picture in agriculture, which concerns this market analysis most keenly, shows that, not only have private sector wages risen at a slower rate than have public sector wages in Agriculture, but employees working for private agricultural enterprises are paid 40% less than those working in public sector agricultural enterprises. Summary A recurring theme in the data and this study is the impact on the whole economy of the demographics of the majority of Kenyan families. Their household and family incomes depend largely on traditional or small-scale agricultural activities. Their production of commodities is not tightly linked to a modern processing, marketing and distribution sector equipped to add value and return higher incomes to the producers. The share of income used for basic commodities is very high at the moment. “The high cost structure of domestic food production, cereals (maize and wheat) and sugar in particular, imposes a significant welfare cost on consumers, borne disproportionately by the poor. Maize purchases alone account for 18% of the budget of the poor (13% of non-poor) and the three commodities for 27% (21%

of non poor).”7 Until the portion of incomes that is available for purchase of packaged consumer goods rises, it will be difficult to generate sufficient demand within Kenya necessary to enable the country to develop a strong processing and manufacturing sector aimed first at consumers in the regional market and secondly in the distant export markets of Europe and the U.S. Until domestic and regional demand increases, the European and American export markets are the more likely source of revenues to grow the Kenyan economy. C.3. Exports The principal sectors, apart from agriculture, are oil refining, food processing, canning and beverages. Kenya’s main exports are tea, coffee, horticulture and petroleum products. Main imports are industrial machinery, motor vehicles and chassis, crude petroleum and refined petroleum products. Kenya is a member of:

• Common Market for Eastern and Southern Africa (COMESA)

• East African Co-operation (EAC) • Inter-governmental Authority on

Development (IGAD) • ACP group in the Lome

Convention COMESA was launched in October 2000 – becoming Africa’s first free trade area. However, at the time, of the organization’s total membership of 21, only nine countries (including Kenya, Egypt and Sudan, but not Burundi, Rwanda or Uganda) agreed to join, thus

7 Mule, Ndii, and Opon, “Kenya. Strategy for Economic Recovery. A Discussion Paper Prepared for the Ministry of Planning,” March 1, 2003



committing themselves to remove all tariffs on imports originating from within the group. Again, the concerns within Comesa have been that the stronger economies like Egypt and Kenya (and previously Zimbabwe) would stand to benefit at the expense of the others. EAC: In June 2000, Kenya, Tanzania and Uganda ratified the EAC Treaty. The aim of the EAC is to first have a Customs Union of some 80 million consumers, then proceed to a Common Market, followed by a monetary union and ultimately a political federation of the East African states. One critical issue on the path to a Customs Union has been the need for a common external tariff (CET) on goods from countries outside the union. A major challenge in reaching an agreement on a CET has been the difference among the three countries in levels of industrial development, economic structures and varying revenue implications. The governments themselves have to tread carefully, bearing in mind that taxes on formal imports are their largest source of revenue. African countries have consistently been the major market for Kenya's exports followed by the European Union (EU). In 1999 the market share of total exports to African countries and EU stood at 46.5% and 31.3% respectively. Among the EU countries, the United Kingdom continues to be the leading market for Kenyan exports with a market share of 44% of exports to the region. In 1998 and 1999

the UK was Kenya's second leading destination after Uganda. D. MARKET STUDY STRUCTURE

This market analysis will examine, principally from the demand side, Tea, Coffee, Garments and Textiles, and Horticulture, including cut flowers. D.1. Kenya Tea Sector Tea is Kenya’s most valuable export, contributing almost 30% by value, while the tea industry is the largest employer in the private sector, with more than 80,000 people working on the estates. The world market is supplied by numerous producers of green teas and black teas. The difference between all types of teas commercially available internationally is dictated by the method of processing. Kenya, which manufactures black tea as opposed to green tea made through the orthodox method, is the world's third largest tea producer and a leading exporter of black tea. Kenyan export teas are manufactured using the Cut, Tear and Curl (CTC) method of manufacture. Tea made by CTC method has more infusion-giving-surfaces and brews stronger, thicker, brighter and brisk teas, which ensures maximum cuppage per unit weight.

World Market: FAO data indicates that, from provisional returns, world tea production in 2002 was only 1% lower than the record achieved in 2001. In addition, large stocks have been accumulated in both importing and

exporting countries. More than sufficient supply in the world market would keep prices low, at least in the short-term, unless world tea demand improved significantly. In addition to low tea prices, the rising cost of production is also a major concern. Most tea producing



countries have been negatively affected by recent increases in oil prices Kenya has ranked at #3 or #4 producer in recent years, after India, China and Sri Lanka. India and China consume domestically the majority of the national

production. Kenya is the world's second largest tea exporter after Sri Lanka and the tea sector is the backbone of the Kenyan economy, earning the country Ksh35 billion ($473 million) annually.

Table 5: Tea yield and gross production: top 4 world producers (FAOSTAT)

Tea Year Yield (Hg/Ha) 1998 1999 2000 2001 2002

Kenya 24,720 21,589 19,330 19,184 21,239 India 19,263 19,610 19,064 19,273 19,213

Sri Lanka 14,820 14,518 16,185 15,616 15,611China 7,823 7,506 7,836 7,967 8,369

Tea Year

Production (Mt) 1998 1999 2000 2001 2002 India 836,000 855,000 835,000 848,000 826,165China 687,675 696,990 703,673 721,536 759,837

Sri Lanka 280,056 283,760 305,840 295,090 310,000 Kenya 294,165 248,700 236,286 216,778 287,000

While Kenya’s gross production is not the highest among all producers, its productivity does rank consistently first. Sri Lanka produces black, plus small amounts of green tea, 90% of which is exported. Only about 10% of Sri Lankan tea may be sold privately. The rest is sold through the auctions in Colombo held every Tuesday and Wednesday throughout the year. In East and Southern Africa, Malawi produces 42,000 metric tons of black tea, 90% of which is exported. Tea from Malawi gives a reddish liquor. Much of it is produced by the Laurie Tea Processing method (the Laurie Tea Processor was a former tobacco-processing machine adapted for the tea trade). Clonal varieties are useful for teabag blends, to which they provide color and the seedling types are basic blending types.

Tanzania produces about 18,000 metric tons of black tea, 70% of which is exported. Strong and fruity flavors characterize Tanzanian teas, which, like Kenyan teas, are produced by the CTC (Cut, Tear, and Curl) method. World tea exports approached 1.4 million Metric tons in 2001, a 5% increase compared to quantities shipped in 2000. Exports from both Africa and the Far East increased substantially. Exports from Africa increased by 14%, reflecting the 21% increase in volume from Kenya as both production and exports recovered from lows caused by adverse weather in 2000. Shipments from other major exporting countries in Africa remained relatively unchanged. In the Far East exports increased in China and Sri Lanka by 10% and 5%, respectively, offsetting the 10% decline in shipments from India mainly because of the weak demand in the CIS countries which account for about a



half of the total tea exported from India and reductions in Bangladesh and Indonesia. World net tea imports also increased, though volumes were less than gross exports by 100,000 Metric tons, largely because of the re-exported volumes. In 2001 global imports reached 1.3 million Metric tons, about 3% more than 2000, reflecting the 6% gain by developed countries, where importers took advantage of lower prices. Net imports into the EC and Japan increased by 4% and shipments to the United States were larger by 10%. Imports by developing countries remained unchanged from levels

reached in 2000. The 2.3% increase in shipments to the Near East, mostly under the United Nation’s decade-long and now terminated Oil for Food program with Iraq, offset the declines in net imports into other regions, notably the Far East and Africa. The reduction in the Far East reflected the decline in shipment to Pakistan, the world’s third largest tea importing country. Although the tea imported by Pakistan was 4% less than in 2001, the volume was similar to the longer-term average of 108,000 Metric tons. Imports to Africa were also reduced by 5% reflecting weak demand in Morocco and Tunisia.





Kenya: The main Kenya tea growing districts are situated in or around the highland areas on either side of the Great Rift Valley at altitudes ranging from 1,500 to 2,700 meters above sea level. Productivity of unprocessed green leaf varies widely in Kenya. The major plantations enjoy a yield of 12,500 kg of green leaf per hectare; the small-holders

about 8,958 kgs of green leaf per hectare; and marginal zones, such as the Nyayo Tea Zones, which farm a 100 meter buffer strip between protected forests and local communities, about 2,710 kgs of green leaf per hectare. Production in kilograms of cured tea per planted hectare also vary widely by district, and by prevailing annual moisture, as may be seen in Table 6.

Table 6: Kenya Tea Production by District in Kgs per planted Hectare DISTRICT 2001 2000 1999 1998 1997 Bomet 2086.05 1097.23 Bungoma

Elgeyo/Marakwet Embu 2606.61 2095.62 2367.51 2453.34 1881.13 Kakamega 1402.55 5099.18 5002.13 5050.48 2417.57 Kericho 2824.65 2372.82 2840.03 3548.15 2731.50 Kiambu 1329.63 1094.13 2049.50 2601.79 1979.02 Kirinyaga 2471.53 2104.15 2356.05 2723.14 2058.87 Kisii 1434.37 1451.57 1329.33 1613.09 1097.04 Maragwa Meru 3606.52 3019.05 3606.31 4076.24 3058.17 Muranga 1571.20 1047.46 2579.79 2993.30 2391.25 Nakuru 402.17 645.52 928.14 1135.69 721.10 Nandi 2337.35 1953.39 2187.43 2891.31 2216.38 Nyambene 186.83 1508.92 Nyamira 1276.92 1434.02 1328.99 2162.97 1566.81 Nyayo Tea Zones (Various Districts) Nyeri 2525.37 2255.69 2440.95 2929.07 2228.39 Sotik Tharaka Nithi Thika Trans-Nzoia Vihiga AVG 1861.55 1941.34 2418.01 2848.21 2028.94 MAX 3606.52 5099.18 5002.13 5050.48 3058.17 MIN 186.83 645.52 928.14 1135.69 721.10398 Data: Kenya Tea Board, 2003



While the Unilever-subsidiary Brooke Bond Kenya Ltd, with 11 factories, owns the largest plantations in Kenya and is the country’s largest single tea producer, the small holders, associated in the Kenya Tea Development Agency (KTDA), are the largest source of tea. As in much of Kenyan agriculture, small-scale tea farmers under KTDA produce 60% of Kenya's tea, while the large-scale

plantations account for 40%. Formerly a government parastatal, KTDA was privatised in June 2000 and is owned by over 370,000 small-scale tea growers through 45 tea factories (an additional 6 are coming into production). It is paid a 3% management fee by the tea factories. KTDA sales amounted to Ksh23 billion ($288 million) in the year ending June 30, 2002.

Table 7: Kenya Tea Producers Production in KGs COMPANY Factories 2002 2001Brooke Bond Kenya Ltd 11 32,199,121African Highlands Produce Co. Ltd. 5 21,806,868Eastern Produce Co. Ltd. 7 17,004,314George Williamson Kenya Ltd. 3 10,074,383Sotik Tea Co. 1 5,218,097Kipkebe Limited 1 7,330,421Kaisugu Limited 1 2,452,595Ngorongo Tea Factory 1 2,206,737Karirana Tea Estates 1 2,658,941Nandi Tea Estate 1 2,785,518Sotik Highlands 1 3,262,492Keritor/Kipkebe Limited 1 7,330,421Tinderet Tea Estate 1 2,345,917Koisagat Tea Factory 1 2,195,141Kiptagich Tea Factory 1 1,195,539Ceres Tea Estates 1 169,439Sub-total 38 112,905,523KTDA (small holders) 45 181,725,815TOTAL 83 287,102,233 294,631,338 Over 84% of Kenya tea is sold through the Mombasa auction, the second largest tea auction in the world. Auctions take place every Tuesday all year round, except on public holidays. Teas are offered at the auction by brokers on behalf of the producers by “garden marks.” Garden marks are manufacturing factories situated within the growing field, with each mark depicting the respective catchment area for the tea grown around it. Buyers export the tea bought, bid among themselves

with the highest bidder buying the whole lot bid for. The auction is conducted under the auspices of The East African Tea Trade Association (EATTA) whose Membership consists of the brokers, buyers, producers, warehousemen and packers. The countries that may sell through the Mombasa auction include Kenya, Uganda, Tanzania, Rwanda, Burundi, Congo, Malawi, Madagascar, Zambia and Zimbabwe.



As tea exports are traded in U.S.$, the value of the Kenya Shilling relative to the U.S. dollar is a key factor in the profitability of Kenyan exports. As depicted by the chart of monthly tea auction prices, below, the Kenya Tea Auction market, expressed in U.S.$, has been largely flat for two years. A resurgent shilling, which had gained 12.8% against the US dollar – from a low

of Ksh77 in January to a high of Ksh67 in mid-May 2003, before weakening to Ksh73 in June and down to Ksh78 in October – can also impact negatively on the tea farmer. Kenya Tea Development Agency (KTDA) officials say that the strengthening of the shilling erodes gains that may accrue from a reduced tea supply at the Mombasa Auction.

Mombasa Tea Auction PricesJanuary 2000 - September 2003

$-

$0.50

$1.00

$1.50

$2.00

$2.50

months

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$/k

g

A drought in March and April 2003 saw Kenyan tea output decline for the second month, with the April crop down by over 8.6 million kg or 31%, compared with the output for the same month last year. Production in April fell to 19.3 million kg from 27.9 million kg recorded the same month last year. In March, the output stood at 15 million kg, down from 21.5 million kg in March 2002. The January-April production amounted to 90.7 million kg, down from 98.1 million kg recorded for the same period last year. The decline was blamed on the late onset of long rains, which started in mid April instead of early March. Kenya’s January-May 2003 tea production reached 116.8 million kilos, effectively reducing the 2003 cumulative shortfall to below 2% of the 2002 production for a similar period.

Export Markets: Taking Kenya’s export markets first by geography, over the period 1998-2002, the South Asian countries purchased US$836,497,000 of Kenyan tea products, while all European countries purchased US$695,332,000 (of which 85% went to UK buyers), and African countries US$574,187,000 (of which 78% went to Egyptian buyers. The annual revenue earned by Kenya from exports of all types of tea, but sold mostly in bulk for blending or repackaging, has declined 22.7% per unit exported from 1998 to 2002. In great measure, this decline in dollar earnings due to declining commodity prices commanded, as illustrated by Table 8, below.



Table 8: Kenya Tea Exports, 1998-2002

1998 1999 2000 2001 2002 Tea exported mT 263,402 241,739 216,990 270,151 272,459

US$ (thou) $545,416 $465,442 $499,037 $437,914 $435,746US$/kg $ 2.07 $ 1.93 $ 2.30 $ 1.62 $ 1.60

Data: Kenya Tea Board, 2003 In 2002, Kenya’s major foreign buyers of tea, by value shipped to a single country, were:

Destination US$ (Thousand)

% total 2002 export Val

2002 vs 1998

Pakistan 101,956 23.4% -25.09% United Kingdom 92,399 21.2% -41.27% Egypt 82,389 18.9% -11.06% Afghanistan 45,290 10.4% 29.71% Yemen Arab Rep 22,869 5.2% 79.29% UAE 15,953 3.7% 25.79% Sudan 13,189 3.0% -37.71% USA 8,987 2.1% 2.42% Ireland (Republic) 6,968 1.6% 6.69% Russia + CIS 6,665 1.5% 981.98% Poland 6,289 1.4% -26.19% Nigeria 4,856 1.1% 5011% India 4,217 1.0% 141.11% Present degree of market competition, including leaders and followers, and the structure/nature of the market; Competition on the world market consists of two groups of producers: traditional producers and competitors and newly emerging competitors. The domestic Kenya market absorbs only 5% of the total tea production. The Kenya Tea Board is seeking to stimulate a growth in domestic consumption from the current 500g to 805g within the next five years with its Local Generic Tea Promotion Campaign. This is hoped to reduce reliance on international markets and to create a fall back position.

Kenya Tea Packers (Ketepa), controls about 85% of the domestic tea market, with a turnover of Ksh6 billion. Ketepa’s majority shareholder is the small-scale tea grower as a group, while the plantation sector, through the Kenya Tea Growers Association (KTGA), holds a 34% stake. Ketepa product is sourced through a requirement that shareholders provide 8% of all the processed tea from the small-scale tea growers’ 45 factories. According to the World Bank's calculations, tea prices in 2002 fell by 6% because of increased world supplies, and stocks remained high. In 2003, higher oil prices in Russia and the Middle East – two of the world's largest tea consuming regions are expected to boost incomes and thereby generate stronger demand for



tea. This will in turn lead to a gradual recovery of global prices. The Bank has, however, warned that if emerging exporters like Vietnam continue to increase exports, there is a significant risk that prices will continue to fall. Even with a 3% increase, prices would still be depressed relative to the highs achieved in 1997 and 1998, it says. In 2003, Vietnam significantly increased its sales to the UK, one of the main buyers globally. Ugandan tea traders are also looking for new outlets in an effort to improve earnings from the crop. Uganda tea dealers travelled to Egypt, the U.S. and Canada to try to get new markets and limit trading at the Mombasa auctions, where prices for Ugandan tea have remained low. "When exported directly to the consumers, a kilo of tea can fetch more than $2, but this is rare at the Mombasa auctions," a Ugandan tea dealer said. An Egyptian delegation visited Uganda in September 2002 to discuss creating consumer awareness in Egypt about Uganda tea. The Egyptians invited Ugandan tea dealers to visit Egypt and organise promotional exhibitions. The Ugandan traders hope to improve their prices by exporting directly to European destinations instead of going through the Mombasa auctions. Both demand for and growth in purchases of Kenyan tea exports are coming from Middle Eastern and South Asian buyers. Two additional growth trends can be seen in new demand from Nigeria and Russia. Nigeria is wholly new as a market, while Russia is a high per capita and absolute consumption market. Russia - One item on the KTDA's agenda was to sell blended tea in bulk to Moscow through a local marketing partner. Russia was buying in January

2003 from Bangladesh, which was coming to the end of its growing season when Russia was expected to start importing East African products. The total tea market in Russia is estimated to be about 150,00 to 160,00 MT annually. Leaf teas account for 90% of the total tea sales in the country, of which 95% are black tea and 5% are green tea. However, recent market reports indicate a growth in consumption of tea bags. There are about 200 Russian tea companies of different size, including private companies, joint stock companies, and joint ventures. At the same time 55% of the Russian tea market is controlled by the four largest companies: Grand, Maiskii Chai, Unilever, and Orymy Trade. India, with a market share of 46%, and Sri Lanka, 35%, were the main suppliers of tea to Russia until 2001. Russia is the largest buyer of Sri Lankan tea, taking 16% of Sri Lanka’s total tea exports to the world. Russian buyers prefer the medium teas, as against the Japanese and Europeans, who buy high grown leaf tea. The European preference for African tea from Kenya is almost unknown in Russia. There is anticipation of growth in demand for green tea, and for herbal and medicinal teas. A ready-to-drink tea, popular in some countries, may successfully rival synthetic soft drinks and become popular in Russia as well if introduced. About half the Russia population drinks only tea, never coffee, but coffee consumption is increasing among the better educated and higher income population, said Sergey Kasyanenko, chairman of Orim Trade Ltd, based in St Petersburg. Most Russian coffee drinkers use instant or soluble coffee, with this category accounting for 76% of imports.



Of coffee drinkers, 91% drink both coffee and tea with only 9% drinking only coffee, he said. Coffee drinking is concentrated in European Russia and the south near Turkey and Armenia, which have strong coffee traditions. Even with the increase in imports, Russia's per capita consumption of coffee will only be 650 grams, compared with four kg in Brazil and 10 kg in Scandinavia. Prodexpo has become the main window for the rapidly growing Russian food and beverage market. In the nine years since its start, Prodexpo has grown significantly, both in size and the number of participants. During Prodexpo 2002, 1,684 medium and small scale firms/companies (including 930 Russian companies) from 56 countries displayed their products. The total number of visitors at Prodexpo was over 95,000. The total area allocated for the exhibition was 25,882 sq. m. out of which 9,740 sq. m., or 38% of the area was reserved by foreign companies. The Russian retail food market is estimated at US$ 25 billion annually. Many food and beverage exporters are using this booming economic period to gain market share. The food sector is leading the Russian economic recovery and the annual growth rate was estimated at 8% last year. In March 2003, The Kenya Tea Development Agency (KTDA) floated plans to add value to tea exports in a new strategy designed to raise farmers' foreign exchange earnings by 25%. KTDA said that the agency would seek to blend Kenya's high quality tea with imported lower quality teas at Mombasa and abroad before selling them in branded packs in foreign markets. Tea blending is currently the preserve of multinational tea trading corporations. KTDA said it was difficult

to say how much the farmers would earn were the project to succeed, but that it was seeking partnerships in the Russia, Dubai and Pakistan markets for the new tea brands planed for sale there. KTDA’s main target was the larger US market. KDTA had commissioned the Tea Technology Association of UK to draw up a feasibility study on the possibility of marketing Kenyan tea in America. "The results were encouraging, so we went ahead on test marketing, which we have also successfully finalised," said a KTDA spokesman. Adherence to import regulations Kenya has found itself slow to react to changes in importing country’s regulations. Markets that have been traditionally important for Kenya can be lost to other exporters, such as Vietnam. The possible cost of non-adherence is illustrated by neighboring Sudan, Kenya’s #5 destination. In October of 2003, the government of Sudan ended a 2-month embargo on Kenyan tea, 60,000 Metric ton having been held within the port for non-compliance with a new packaging regulation. Sudan had given Kenyan exporters until July 31, 2003, to comply with the directive to package the tea sold there in one-kilo packages. The Kenyans did not respond but continued to sell in larger packages. The Kenyan government appealed to its Sudan counterpart to push the deadline to February next year. Kenya’s Trade and Industry minister had not had a response to the new appeal. The minister expressed disappointment with Kenyan tea packers for failing to respect the July 31 deadline. "I want to urge them to comply because this is an easy issue to comply with. They should take the opportunity also to create secondary employment for packaging in the smaller packets required,'' he said.



In the case of Egypt, Kenya tea has been vulnerable to fall-out from tariff disputes between the two countries. In July of 2000, for example, the Egyptian Ambassador to Nairobi said his government “had run out of patience and could no longer allow Kenyan tea to enter the Egyptian market at the present rates. The envoy accused Kenya of ignoring tariff guidelines agreed on by member states of the Common Market for Eastern and Southern Africa (Comesa). He said his personal appeals against Kenyan authorities charging 36% import duty on Egyptian rice had landed on deaf ears.”8 Egypt has entertained alternative suppliers from Uganda in 2003. Productivity and Yield Improvement In 2001, Kenya's large-scale tea farms began replacing old bushes with new high-quality, high-yielding tea that is expected to improve tea production within five years, Tea Board of Kenya officials say. "All the big companies are now replacing most of their old tea bushes, especially those with a lifespan of over 50 years, after the development of new varieties at the Tea Research Foundation," said Mr Joseph Gichuru of Tea Board of Kenya. In January 2003, green leaf deliveries exceeded the crushing capacity of a Kericho tea factory. Tegat factory vice-chairman, Mr William Kettienya, yesterday explained that its crushing capacity was 70,000 kg per day but it had been receiving an extra 150,000 kg of produce a day. As a result, he said, tea farmers were losing Ksh3.1 million weekly with some 100,000 kg of green leaf going to waste. Mr Kettienya said efforts to zone the collection of produce had not yielded any meaningful result. "Most of the tea is 8 The Nation, July 12, 2000, “Egypt fires tariff salvo”

rotting in buying centres since the factory cannot cope with the high production," he said. He said the nearby Chemamul factory, whose crushing capacity is 50,000 kg per day, could not alleviate the problem. The official said the district needed three more factories to cope with the high production and asked the Kenya Tea Development Agency to identify partners to build the factories. He said his board had identified Chemogusu area for construction of a factory and was studying two other sites for the new plants.9 The industry has been working under rising costs of production. In the large estates sector, labor costs account for some two-thirds of production costs ex-factory. The main problem arises from the pattern of wage awards imposed on the industry, but it has been exacerbated by rising welfare costs assumed by the larger employers. Since 1990, the basic wage rate has risen 10 times; even since 1998 it has gone up by more than 50%. Small producers have been resigning from the industry body in order to escape the statutory award. Kericho labor costs are twice those in Uganda. Daily rates paid by small-holder farmers in rural area are half the estates rate and without any welfare benefits. Reducing labor costs through field mechanisation is already happening in several other tea producing countries.10 Increasing processing capacity in the small-holder sector will serve to increase over-production. Whether producers may be able to optimize their operations is open to question. Recently renewed attempts by Brooke Bond to automate their plantations with tea-picking machines were opposed in Parliament by

9 The Nation, January 8, 2003, “Tea factory reels under bumper crop” 10 The Nation, October 3, 2003, “Trouble brewing,” commentary by Sir Michael McWilliam



MP’s who warned that many plantation workers would lose their jobs. Brooke Bond East Africa's chief executive said the move was intended to improve profit margins by reducing the number of tea-pickers. MP’s noted that 90% of labor employed in the Kenyan tea sector is engaged in manual tea picking. Brooke Bond said the use of the machines could increase its profits per hectare by Ksh36,000 and nearly Ksh20 million a year. "The management is looking at the proposal but we are not going to introduce full mechanisation in Kenya because of the social consequences,'' Brook Bond said. Some portion of the Kenyan labor force could be transferred from manual labor in the production of a commodity to the production of value-added, packaged and branded consumer goods. The implications for paper products, packaging machinery, wholesaling and retailing, as well as marketing and advertising could be significant. Additionally, household incomes could increase, and it would be more likely that the Kenyan tea sector could thrive against new competition by cutting free from competition among commodities. Experiments by the KTDA in marketing blended and packaged teas should be followed closely. A similar tactic will be seen in the Kenyan coffee sector. Sales on Domestic and Regional Markets The previous point has value also for the improvement of sales on the domestic, regional and distant markets. While of marginal significance in the larger picture of Kenyan tea exports, the domestic and regional markets can provide two important values. The first is mastery of the full cycle from production to

consumer retailing. The second is responsiveness to varying tastes. Tanzania Tea Packers (Tatepa), the country's largest integrated tea business, blends and packs Chai Bora, a popular brand that commands an estimated 70% of the Tanzania market. Kenya Tea Packers (Ketepa) have attempted similar success, advertising its Fahari tea on television to promote mass consumption. Unfortunately, its commercial backfired by suggesting that competing companies could be packing other products, like ground tree leaves, instead of tea. Ugandan tea traders are now looking for new outlets in an effort to improve earnings from the crop. Appropriate pricing and distribution of tea blends for domestic consumption should be focused on the non-rural market, and the rural market outside the tea-growing regions. Attention should be paid to learning which are the appropriate educational channels to increase knowledge of the product and to appropriate distribution channels. The distant markets could be approached on the same basis as the Kenya coffee producers: quality. By establishing a appellation system that links back to the growers’ regions and processing factory, the KTDA could micro-brand varieties and blends of Kenyan tea for sale blended, packaged and labeled by origin in the US under AGOA and in the UK in direct distribution agreements with retailers. The Russian market would require a different approach, partnership with a local distributor, to overcome tariff and quota barriers. D.2. Coffee Sector



D.2.a. recent market trends over time, including in terms of value, volume, and market growth, and identify market niches and growth/export potentials; Coffee production and export in Kenya has been uneven for a number of years. According to data from the International Coffee Organization (ICO), Kenya’s sales have flattened out to less than US$100 mln in 2001. What Kenya produces, it

does sell on the world market, although current prices are causing some Kenyan growers to withhold beans from the present marketing system, both until unit prices improve and until there is an improvement in the now very long delay in payment by their Kenyan auction agents. Some factors governing its coffee sales are external while others are internal.

TOTAL PRODUCTION OF ICO EXPORTING MEMBERS CROP YEARS 1997/98 TO 2002/03; R = Robusta, A = Arabica (in 1,000 bags) Crop year commencing 1997 1998 1999 2000 2001 2002 TOTAL 96,213 106,055 114,485 112,334 110,199 119,356

1 April 36,270 49,737 44,776 44,850 46,429 60,4211/ Angola (R) 64 85 55 50 21 56 Bolivia (A) 153 150 184 173 124 149 Brazil (A/R) 22,758 34,650 32,345 32,005 33,950 48,480 Burundi (A/R) 297 356 501 337 257 433 Ecuador (A/R) 1,191 1,206 1,198 871 893 731 Indonesia (R/A) 7,759 8,458 5,499 6,947 6,731 5,670 Madagascar @ (R/A) 623 992 427 366 147 417 Malawi (A) 61 64 59 63 60 44 Papua New Guinea (A/R) 1,076 1,351 1,387 1,041 1,041 1,147 Paraguay (A) 34 34 28 31 31 31 Peru (A) 1,930 2,022 2,663 2,596 2,749 2,900 Rwanda (A) 194 222 308 273 307 280 Zimbabwe (A) 130 147 122 97 118 83

1 July 3,278 2,627 3,061 2,861 2,601 3,160 Congo, Rep. of @ (R) 3 3 3 3 3 42/ Cuba (A) 300 280 328 313 285 292 Dominican Republic (A) 941 422 694 437 432 650 Haiti (A) 435 442 402 422 402 4252/ Philippines (R/A) 935 685 739 775 759 729 Tanzania (A/R) 624 739 837 821 624 9802/ Zambia (A) 40 56 58 90 96 802/

1 October 56,665 53,691 66,648 64,623 61,169 55,775 Benin @ (R) 0 0 0 0 0 12/ Cameroon @ (R/A) 889 1114 1,370 1113 1,200 1,1002/ Central African Rep. @ (R) 115 214 241 122 75 1172/ Colombia (A) 12,211 11,024 9,398 10,532 11,999 11,2502/ Congo, Dem.Rep. of (R/A) 800 644 457 433 430 7352/ Costa Rica (A) 2,500 2,350 2,404 2,253 2,166 2,188 Côte d'Ivoire @ (R) 4,164 1,991 6,321 4,846 3,492 3,4332/ El Salvador (A) 2,175 2,056 2,599 1,706 1,629 1,3422/



TOTAL PRODUCTION OF ICO EXPORTING MEMBERS CROP YEARS 1997/98 TO 2002/03; R = Robusta, A = Arabica (in 1,000 bags) Crop year commencing 1997 1998 1999 2000 2001 2002 Equatorial Guinea @ (R) 2 1 0 0 0 22/ Ethiopia (A) 2,916 2,745 3,505 2,768 3,756 3,750 Gabon @ (R) 3 4 2 0 1 22/ Ghana (R) 28 45 44 38 17 452/ Guatemala (A/R) 4,219 4,893 5,120 4,940 3,669 3,143 Guinea (R) 172 140 112 114 101 1252/ Honduras (A) 2,564 2,195 2,985 2,667 3,036 2,5002/ India (A/R) 4,729 4,372 5,457 4,526 4,950 4,588 Jamaica (A) 46 29 39 37 30 42 Kenya (A) 882 1,173 1,502 988 992 918 Liberia (R) 5 5 5 5 5 53/ Mexico (A) 4,802 4,801 6,219 4,815 4,200 4,0002/ Nicaragua (A) 1084 1073 1532 1,595 1,108 8172/ Nigeria (R) 45 46 43 45 41 452/ Panama (A) 218 192 167 170 160 1503/ Sierra Leone (R) 50 24 76 28 15 453/ Sri Lanka (R/A) 58 35 38 43 31 403/ Thailand (R) 1,293 916 1,271 1,692 521 907 Togo @ (R) 222 321 263 197 116 3002/ Trinidad and Tobago (R) 20 17 16 14 14 153/ Uganda (R/A) 2,552 3,298 3,097 3,205 3,507 3,1002/ Venezuela (A) 986 1,001 717 956 775 1,0702/ Vietnam (R) 6,915 6,972 11,648 14,775 13,133 10,000 1/ Derived on the basis of closing stocks as at 31 March 2003 2/ Estimate to be confirmed by the Member 3/ Estimated © International Coffee Organization World Market Issues: Over-production of all types of coffees is estimated at 10 million bags annually. In the drive to liberalize trade, the International Coffee Agreement was abandoned in 1989. This pact between coffee producing and consuming nations had helped to regulate the supply of beans via a quota system to the market, keeping prices relatively stable. Another factor, is that, as it has in

the tea sector, Vietnam has become a strong new competitor on the world coffee market, and is exporting more Robusta varieties than any other single country except for word leader, Brazil. The decrease in unit prices for Robusta varieties has tended to pull down unit prices also for the more valuable Arabica varieties. Finally, the role of governments in the production and selling cycle has



been eliminated, requiring producers and cooperatives to rely on their individual credit-worthiness to fund their production cycle locally and often expensively but to market on a price-depressed world market. The Kenyan growers – largely small-holders, are upside down in a classic “buy-high and sell-low” market, in part due to the inflexibility of their domestic coffee marketing structure. Coffee consumers in importing countries spend over US$ 55 billion but these countries transfer only about US$7-9 billion to producing countries. In the present value chain of coffee, the importing countries, the importers' agents, coffee roasting factories, and distributors and retailing outlets in importing countries share 70% of the total value of coffee, compared to the 30% share to coffee growers, primary processing milling and primary marketing agents in producing countries. One proposal by Oxfam has nearly one million Metric tons of surplus coffee destroyed each year to force prices up again. Another proposal has world farmers funded by a windfall tax on the earnings of the coffee giants such as Starbucks, Nestle, Kraft and Sara Lee. The link between the farm-gate in Kenya and a coffee house in Seattle, however, is tenuous. A report by Fairtrade Foundation11 cites Jan Thomas, who stated (in ‘From Plantation to Cup’ World Coffee & Tea, September 1995) that coffee beans may change hands up to 150 times before they reach consumers. Coffee is the world's second most traded commodity after crude oil, but unlike oil, it is no longer a valuable foreign-exchange earner. A retail coffee chain spends a

11 “Spilling the Beans on the coffee trade,” http://www.fairtrade.org.uk/downloads/pdf/spilling.pdf

small share of their actual costs on the coffee itself. The local retailing costs of real estate and marketing consume a much greater share. While the ICO hopes for an increase in consumption, statistics show that although world demand for coffee is rising by around 1.5% per annum, the annual growth in world supply is greater still: 3.5%. Kenya Coffee Sector After tea, coffee is the next-most important export for Kenya today. Coffee cultivation began in Kenya about 1900, when missionaries planted Ethiopian Arabica coffee. From this initial plantation of about 250 hectares near Nairobi, the Kenyan coffee sector has grown to an estimated 160,000 hectares. All coffee produced in Kenya has been marketed on behalf of the planters by the Coffee Board of Kenya, through an organized and open weekly auction in Nairobi. The industry-funded Coffee Research Foundation at Ruiru, Kenya, undertakes specialized research involving all aspects of coffee production: plant seedlings, control of coffee diseases, pest control and farm management. As is with tea, 65% of Kenya’s coffee is grown by small-scale farmers. As noted, the world coffee market is monitored but no longer regulated by the International Coffee Organization (ICO), an intergovernmental body. Kenya’s representatives to the ICO include the Mild Coffee Trade Association (MCTA) and the Coffee Board of Kenya (CBK). Like its tea, Kenyan coffee is auctioned and sold largely unprocessed. The Coffee Board of Kenya is a majority shareholder of the Kenya Coffee Exchange and Kenya Coffee Auctions Limited, which conduct the auctions. Only interim marketing agencies – the Kenya Planters' Co-



operative Union (KPCU), the Thika Coffee Mills and Socfinaf – are allowed to trade at the auctions. Membership of MCTA, which requires adherence to defined ethical and financial standards, is a CBK requirement for admittance into the auctions. More than 100 traders are registered as coffee dealers in Kenya. Of these, nine coffee traders, including Cetco, C. Dorman, Taylor Winch, Pati, Ibero Kenya Limited, Green Coffee, Gourmet and Hans Sickmuller, handle about 70% of Kenyan coffee exports. Kenya produces and exports Columbian Mild varieties of Arabica. World exports of Columbian Milds over the period October 2002 to August 2003 totaled 1.4 million metric tons, of which Kenya’s share was 6.8%. The market leader for these varieties, Columbia, supplied 86% of world imports. Brazil is the world export leader in Brazilian Natural varieties, while Vietnam has entered the coffee export market strongly in the less-expensive

Robusta varieties, used in blends. The world’s leading importers of all varieties of coffee are the United States and Germany. The European Union, as a whole, is the main importer of coffee. Kenya's washing systems of processing the entire crop in central pulperies, coupled with the near-perfect conditions for the growing of Arabica, give an exceptional coffee, distinguishes it from low quality, cheaply dry-processed commercial coffees. There is a scarcity of top quality washed Arabica and buyers cannot find enough Kenya coffee for their blends. At the same time, there is a glut of ordinary commercial coffee selling at very low prices. Many farmers (small and some large scale) are uprooting coffee and turning to other which give a more secure income. This is happening at a time when the world market has been educated to prefer quality coffee of the type produced in Kenya.

Kenya Coffee Exports in CY US$x1,000

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$200,000

$300,000

$400,000

$500,000

$600,000

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Changes in the Kenya Coffee Sector Moves toward liberalization of the Kenyan coffee sector have stimulated debate. In January 2001, the previous KANU Government and coffee growers clashed over a government decision to

extend the tenure of the directors of the Coffee Board of Kenya. The legality of the incumbent board had been in dispute since 2000, when, rather than ordering elections of delegates to a new board, the former Agriculture Minister ordered the board members to convene to extend its



tenure by six months, which he did a second time in 2001. The minister's action came only a day after the producer association, the Kenya Coffee Growers' Association (KCGA), had issued a statement calling for the immediate election of new directors for both the board and the Coffee Research Foundation. In December 2001, Parliament passed the Coffee Bill 2001, to become effective automatically on April 1, 2002. One provision of the Bill had the Coffee Board of Kenya remaining the industry's regulator, but its marketing role opened up to competition from other marketing agents. The idea was to take the Government out of the coffee business altogether. This was not realized. The new marketing agent would turn out in 2003 to be the Kenya Planters’ Cooperative Union, under the sponsorship of the Minister of Co-operative Development in the new NARC government. The changes in relations among former parastatals and the government were propelled by a February 2003, announcement that the Coffee Board of Kenya could not pay coffee farmers Ksh640 million ($8 million) owed them for previous year's deliveries unless the government guaranteed loans from commercial banks. The proceeds the CBK had collected on behalf of farmers for 2002 sale No.’s 32-36 had gone missing. The NARC Co-operative Development Minister said he was liaising with his Agriculture counterpart to secure a guarantee from the Treasury to ensure that farmers - organized mainly in cooperatives - were paid. The consequences for the coffee small-holder sector were considerable. Twenty-seven coffee cooperative societies in

South Nyanza had a total of Ksh2.4 billion non-performing loans in the past seven years due to failure by the Coffee Board of Kenya to pay farmers. The loans, part of the World Bank-sponsored Second Coffee Improvement Project (SCIP) scheme, were financed through the Cooperative Bank of Kenya. The SCIP program was in two phases; coffee factory improvement and a farm input development program. A report by the Ministry of Agriculture said that a number of coffee growers societies had shut down because of the diminishing returns from the crop mainly due to the huge loans the societies owe. Because of their non-performing loans, some societies were unable to access credit for crop improvement from Cooperative Bank and other financial institutions. Weaknesses in the Cooperative Act contributed to the problem. Thika Coffee Mills owed some cooperative societies millions of shillings. The Kenya Planters Cooperative Union (KPCU) that represents smallholders and coffee plantation cooperatives had been facing financial problems. On the heels of this financial crisis, the Co-operative Development Minister announced that the government would empower the KPCU to process and market coffee in the international market. Only KPCU, Thika Coffee Mills and Scofina are licensed to market coffee. In addition, a Ksh20 billion instant coffee processing factory was to be built in western Kenya, perhaps by the end of 2003, if funds could be raised. Despite the glut, the Minister also urged farmers to plant more Robusta coffee “to enable the country to fulfill its world market quota and to supply the instant coffee processor.” KPCU officials said they would first target the traditional European markets and later diversify to other untapped areas. The KPCU general



manager and the Cooperative Development Minister had traveled abroad to pursue direct markets. The KPCU, once only a coffee miller and marketer, in fact was issued a "Dealer A" export license by the Coffee Board of Kenya. This license permits the KPCU to mill, market at the Nairobi Coffee Exchange, export, package and warehouse the produce. In August 2003, the newly licensed coffee exporter debuted at the Coffee Exchange with heavy buying. The average price rose by 13%. Officials thought the KPCU had bought about 80% of the prime coffees. The highest price paid was for the AA grade at $201 which KPCU paid the Ruarai Cooperative Society in Nyeri. During the previous auction the best price was $119. Consistency of Production In 2002, coffee farmers from Nyeri had won world awards for producing the best coffee crop. The farmers from Ndaro-ini, Gichatha-ini and Gatumbiro factories in Mathira division won the annual Starbucks Coffee Company and C. Dorman 2001 Award. The managing director of Dorman, an agency of the US-based Starbucks Coffee, presented farmers with the awards at Gichatha-ini Factory in the division. However, he noted that Kenya's coffee production had been unpredictable. Sometimes the country produces good quality but at other times, the quality goes down, he said. This has made the amount of top quality coffee produced to be insufficient to meet overseas demand. Regional Market The regional market is also a producer of coffee varieties. Uganda, a major exporter of robusta varieties, embarked on a

campaign to cease exporting raw coffee and add value to its beans in order to obtain better prices from its main export. Among the measures planned is the manufacture of instant coffee in the country. A feasibility study was expected to be ready in July 2003, according to officials of the Uganda Coffee Development Authority (UCDA), the local regulatory body. The study was commissioned recently after a project to produce soluble coffee by a consortium of exporters at the Bukoba plant in neighboring Tanzania proved profitable. The Star Cafe brand is manufactured from Uganda robusta and is currently competing with imported brands on the local market. According to UCDA, Uganda is capable of earning $15 from every 3 kg of green coffee processed into instant coffee, compared with only $1.5 when exported in its raw form. The European Union is the main buyer of the country's coffee. Uganda is also promoting the growing of organic coffee, which commands still better prices on the world market. Organic coffee is grown without the use of fertilizers and pesticides, and so is perceived as healthier and better value. More than 1,000 Metric tons were exported last year at $300 per ton. In July 2003, a Kenyan government delegation, led by the Cooperative Development minister left for the US to finalize plans to sell Kenyan coffee directly to buyers in the US. This would be the first time for the Kenyan coffee to be auctioned abroad. Currently, all the commodity is sold at the Nairobi auction where brokers buy it for resale to world consumers in their own brand names. In some cases, the brokers add value by roasting, grading and packing the coffee



before re-exporting it at a higher price. The Minister said the Government intended to acquire machines to fully process the crop to maximise returns for farmers. He blamed poor local prices on bad marketing and the failure to fully process the crop before exportation. The minister said the Kenya Planters Cooperative Union (KPCU) would be empowered to process and market the crop in the international market. There are no processing or packaging standards in the EAC for Kenyan coffee. Other EAC members, notably Uganda and Tanzania, have already moved ahead to begin processing Robusta varieties into a branded instant coffee product for the EAC market. The Kenyan cooperative system that supports the many small-holders, and apparently to be maintained by the present Government, may not be flexible or agile enough to take advantage of commercial opportunity. The KPCU is apparently being encourage to hunt elephants in the highly competitive US coffee retailing market than on bagging profitable small game in the regional market. D.3. Horticulture Sector Participants in the world horticultural sector are numerous. New producers such as India, Indonesia and Australia are encouraging their nationals to enter the world market. Horticulture, in this study, includes the production and distribution of fresh vegetables, fruit, cut flowers and potted plants. At least 145 countries are active in cut flower cultivation. World consumption of floriculture is estimated at US$40 billion, of which US$26 billion is contributed by cut flowers alone.

Consumption of cut flowers is concentrated in three regions: Western Europe, North America and Japan. Japan is the largest single consumer of cut flowers.12 Australian interests believe that, within the next 30 years, Asia will represent the largest consumer market in the world for floricultural products. There is potential to expand into new Asian markets with perhaps the most significant being China where a very small rise in per capita consumption will translate into large sales. Over 65 countries are involved in the international trade in cut flowers and foliages. The main countries exporting fresh flowers are:

• The Netherlands • Colombia • Israel • Ecuador • Spain • Italy.

The Netherlands is a domestic producer, importer as well as the largest exporter of cut flowers (68% of world exports) and pot plants (51% of world exports) and is regarded as a center for florist products. It is followed by Columbia with 10% share of the world’s cut flower exports. Italy is the third largest producer of cut flowers by value. Consumption European Union The European Union (EU) as a whole consumes more than 50% of the world’s flowers. Germany is the mainstay of international flower trade and is the

12 Technology Innovation Management and Entrepreneurship Information Service (TIMEIS), New Dehli



biggest and most influential market in the EU. The UK is currently the second largest importer of flower products and up to one-half of all flower sales are through supermarkets and chain stores. There is strong demand in the Netherlands, Switzerland, Italy and France. The main fresh cut flowers such as Rosa, Dianthus, Dendranthema are exported to

the EU in considerable amounts by countries like Colombia, Kenya, Zimbabwe and Ecuador. The market for these products is very competitive. Consequently, the margins are relatively small and under pressure. For new producers from developing countries other than the ones mentioned above, entry to such a competitive market is rather difficult.

U.S. U.S. consumption of floriculture crops13 amounted to US$5.5 billion in 2001, up 3% from 2000. Preliminary production estimates from grower wholesale receipts were up 3.5%, from $4.6 to $4.7 billion. Consumption of flowering, bedding, and foliage plants was $4.5 billion in 2001, compared with less than $1 billion for cut flowers. U.S. floriculture imports were more than $900 million in 2001, but down

13 U.S. Department of Agriculture, Economic Research Service, “Floriculture And Environmental Horticulture Yearbook” (ERS-FLO-2002), May 23, 2003

3.5% from 2000 as the total quantity of imported cut flowers continued to drop from their peak in 1996. The higher exchange value of the dollar is in part behind the decline in import value. The import share of U.S. consumption of floriculture crops was 17% in 2001, down from 21 percent in 1996. Without cut flowers, the import share was 7.5%. As prices of imported cut flowers started falling since 1992, imports started to supplant domestic production. U.S. grower receipts began falling even earlier, since 1990. Imports surpassed domestic producer sales in 1995, and the import

EU Consumption of cut flowers and foliage, 1996-2003 (US$ million) Country 1996 1997 1998 1999e 2003proj

Germany 3,983 3,478 3,494 3,343 3,492 Italy 2,025 2,001 2,101 2,152 2,557 France 2,127 1,930 2,027 1,939 2,350 UK 1,439 1,628 1,803 1,908 2,197 Spain 746 667 732 1,187 936 The Netherlands 670 551 561 543 561 Belgium & Luxembourg 483 443 456 435 504 Austria 457 417 417 382 460 Sweden 391 338 348 172 404 Denmark 241 218 223 207 287 Finland 277 223 221 201 232 Greece 178 163 157 163 200 Portugal 135 137 147 148 207 Ireland 73 68 82 98 105 TOTAL 13,225 12,262 12,769 12,878 14,492 Source: Flower Council of Holland (1999, 2000) AIPH (2001)



share of U.S. cut flower consumption is now 60%. Cut flower imports make up half of total U.S. imports of floriculture and nursery products. The other half is composed largely of other floriculture crops. Among the major cut flower imports, only roses (hybrid tea) increased in quantity in 2001. While prices of domestic cut flowers were down slightly from 2000, import prices were down sharply, now 14% below 1997 prices. The competitiveness of foreign growers stems from lower labor costs, smaller climate-control investments, and their cheaper currencies. Overall prices of cut flowers in 2001 were 6% lower than prices in 2000, and 10% below 1998 prices. Japan

Flowers have appeared for sale in supermarkets and various other stores. In the late 1990’s there was indication of a decline in demand for flowers for hotel decoration and ceremonial occasions such as weddings and funerals following the collapse of the bubble economy. The increase in living standards and changes in the residential environment have encouraged people to seek ways of brightening up their lives, and flowers are now enjoyed by a growing number of families.

Demand for cut flowers in Japan is increasing yearly, and annual spending per household in 1997 was around JPY13,000. As the average household makes around 10 purchases per year, each household

purchases around JPY1,000 of cut flowers once per month.

The three most popular varieties-chrysanthemums, roses and carnations-account for 60-65 % of total demand, but they too are increasingly being imported. Imported cut flowers are consequently growing from being niche to central important products.

Household consumption, with the exception of special occasions, used to mean the purchase of ikebana for tokonoma (alcoves in Japanese-style rooms). Ikebana requires artistry. In recent years, though, there have been less formal ways of enjoying flowers. More interiors are being decorated with everyday flowers. Following the boom in potted plants and flower beds that people care for themselves, demand has shifted from cut flowers to potted plants and seedlings. The Japan Flower Promotion Center predicts that demand for cut flowers and potted plants will rise by around 60% by 2005 due to growth in the casual flower and personal gift markets. World Exports The European Union as a whole is the main market for exported cut flowers and foliage. Data from the Eurostat depicts the role of Kenya in supplying the EU demand. In volume and value, Kenya’s exports have increased over those of Colombia and Israel, while other East and Southern African nations (Zimbabwe, Zambia and Uganda) play a lesser role in the EU market.



Imports of cut flowers and foliage into the EU (US$ thousand/ € thousand/ tonnes ), 1998-2000

1998

1999 2000

value US$ volume value US$ value E volume value US$ value E volume

Total 3,077,099 689,716 2,956,854 2,789,485 698,844 2,643,170 2,873,011 602,067

Extra-EU 667,118 152,283 617,515 582,561 178,437 592,953 644,514 155,683

Developing countries 484,212 105,730 482,615 455,297 139,190 485,892 528,143 124,510

The Netherlands 2,129,159 479,579 2,073,900 1,956,509 434,162 1,808,294 1,965,537 367,589

Kenya 124,871 29,907 139,312 131,426 35,982 141,612 153,926 40,680

Colombia 114,860 18,951 99,640 94,000 26,887 96,399 104,782 18,613

Israel 165,094 41,059 119,782 113,002 34,040 93,627 101,769 25,440

Spain 94,669 23,905 88,987 83,950 34,178 80,061 87,023 28,973

Ecuador 61,442 9,840 66,732 62,955 11,870 71,933 78,188 13,003

Zimbabwe 56,422 14,447 54,919 51,810 16,944 60,831 66,121 19,761

Italy 75,263 12,423 65,074 61,391 11,568 50,603 55,003 9,876

Belgium na na 34,624 32,664 8,333 37,083 40,308 20,671

Germany 29,085 6,220 27,631 26,067 19,899 24,381 26,501 5,528

France 25,264 5,107 20,952 19,766 5,914 21,063 22,895 5,871

United Kingdom 12,753 2,536 17,063 16,097 4,123 18,101 19,675 5,128

Thailand 18,693 3,520 17,293 16,314 3,417 16,980 18,457 3,488

Zambia 13,651 2,642 16,944 15,985 3,080 16,071 17,468 3,142

India 19,444 5,849 16,918 15,960 5,918 14,308 15,552 5,083

South Africa 15,166 3,941 13,691 12,916 3,727 11,754 12,776 3,296

Uganda 5,366 1,173 5,970 5,632 1,326 9,775 10,625 2,211

Source: Eurostat (2001) U.S. Total floriculture and nursery crop sales increased continuously in the past two decades, as have floriculture crops and nursery crops separately in the past decade. Floriculture crop sales reached $4.7 billion in 2001, and nursery crop sales were $8.6 billion, as represented by grower cash receipts. These are up from only $1 billion and $2.5 billion, respectively, in 1980. Among floriculture crops, only cut flower receipts have declined since the late 1980s. These production declines were more than offset by imports, however, as the dollar's exchange rate appreciated. The growth in demand for other floriculture crops and for nursery crops is reflected partly in increased domestic sales, but more so in

higher imports, especially of nursery crops. Foreign supply of cut flowers, which comprise about 50 percent of total floriculture and nursery crop imports, is largely from South America, whereas nursery stock is mostly from Canada and the European Union. Among the geographic regions of the United States, the Western States were the highest per capita consumers of floriculture and nursery crops. In 2000, per capita sales in Western States were $68. In the next highest, the Southern States, per capita sales were $55. North-central States averaged $30, and Northeast States, $25. Among individual States, Oregon had the highest per capita sales--



$191, followed by North Carolina at $123. Florida was third at $97. Based on State shares of U.S. cash receipts from floriculture and nursery sales in 2000, four States--California, Florida, Texas, and North Carolina--accounted for half of total crop value. Three-quarters of total U.S. cash receipts were earned by Western and Southern States. For the United States, consumption per household of floriculture and nursery products in 2000 amounted to $134, more than double 1985's $66 and triple 1980's $44, based on nominal wholesale value. Asia, Japan

Japan (Asia's main market) receives its supplies from a more diversified base, with Taiwan (China), New Zealand and Europe being the most important ones. The largest source of imports is Holland,

which exports varieties and new species of every kind to Japan (especially chrysanthemums, lilies and tulips). In Holland, cut flowers are produced on a commercial basis, in contrast with Japan, where cut flowers are produced by individual growers for delivery to agricultural associations. Next is Thailand, which exports large quantities of cheap orchids (1997 prices: JPY80-100/piece) to Japan as they can be used to create a tropical atmosphere. Third is the horticultural nation of New Zealand, where Dutch people have gone to produce cut flowers. Large quantities of orchids (particularly cymbidium), of which only the flower kept at low temperatures, are imported from New Zealand from December to March during the Japanese off season. The main imports from Singapore, Australia and Colombia are orchids, protea and carnations.

In 1997, three out of every four carnations imported into Japan were from Colombia. Roses from India also entered the Japanese market. To earn foreign currency, Indian rose growers have been increasing production on the Deccan Plateau and shipping large volumes to Japan. Annual growth in these shipments has been sensational, pushing them to

more than 17 million flowers in 1996, with an even greater increase estimated for 1997. Indian roses are grown with European technology and materials, but at very low cost.

Total demand for cut flowers in Japan in terms of value was around JPY180 billion per annum in 1997. Approximately 90% is

Source of Japan Imports 1992 1993 1994 1995 1996 HOLLAND 5,066 6,213 6,674 6,903 5,124

THAILAND 3,482 3,732 3,875 3,767 3,504 TAIWAN 911 824 711 707 811

NEW ZEALAND 1,776 1,869 2,719 2,825 2,704 SINGAPORE 1,777 1,547 1,416 1,497 1,452 AUSTRALIA 873 952 1,013 1,108 1,104

USA 586 520 521 478 444 COLOMBIA 384 471 583 678 866

TOTAL 15,791 17,276 19,179 19,878 18,021 Unit : JPY million Source : Japanese Ministry of Finance, "Japan Trade Monthly" (Note that due to imports from other countries, the total imports from the above eight countries do not equal imports in the total column.)



produced domestically and 10% imported. Japanese imports of cut flowers started in the late 1960s when chrysanthemums were imported from Taiwan, followed by imports of orchids from Southeast Asia (especially Thailand). Imports then leveled off, but increased rapidly from 1985, and the proportion of cut flowers imported has increased from 5-6% to 10%. Domestic cultivation of cut flowers is being affected by the gradual aging of the Japanese workforce and the shortage of successors, which has resulted in a growing reliance on imports. 10% of all cut flowers are now imports, and this figure looks set to increase to 20-25% in the near future. The fact that a single variety can be obtained cheaply (30-50% cheaper than domestic prices) in advance in volume is a further attraction of imported cut flowers.

Initially, varieties and new species which could not be planted in Japan or which were unusual and not found in the country were imported, and shortages between harvests in Japan in autumn and winter were prevented by importing from New Zealand and Australia in the southern hemisphere. Recently, however, there has been a growing tendency to import cheaply from overseas due to the high cost of domestic varieties. An advantage of overseas produce is that it has become possible to obtain cheaply and in volume which meet customer demands.

Kenya: Kenyan horticultural exports are some 120,000 Metric tons annually (2003) almost all to the EU. The exports are valued at US$340 million locally, before airfreight costs. The sector employs over 80,000 people and with associated industries and dependents some 500,000 people are reliant on this key export industry.

Horticulture is growing fast in the Kenyan economy. Unlike other agricultural sub-sectors, it has developed through the strong involvement of the private sector and limited Government intervention. Between 1995 and 1999, exports of fresh horticultural produce increased from 71,000 tons to over 99,000 tons. Exports of cut flowers have, in particular risen since the mid-1990s, with Kenya Flower Council (KFC) showing output rising from 29,374 metric tons in 1995 to 41,396 tons in 2001 and export receipts from US$60.7 million to US$120 million over the same period; cut flowers are now the second largest source of merchandise receipts after tea.14 The main export markets for Kenyan horticultural produce include The Netherlands, United Kingdom, Germany, France, other European Union countries, Middle East and South Africa. Efforts have been made to penetrate Japanese and other Far Eastern markets. There are now regular shipments of out-of-season vegetables to Australia. There are several large and integrated horticultural producers-exporters. Two are EFA and Homegrown. EFA is a major exporter of cut flowers to the European Union. Homegrown is Kenya's biggest exporter of flowers and fresh vegetables to UK chains such as Marks and Spencer and Tesco.

14 The Kenyan Economy: Sectoral Overview, December 2002, Raitt Orr & Associates Ltd for the Ministry of Foreign Affairs and International Co-operation.



D.3.a. Cut Flowers

Kenya Exports of cut flowers and foliage by EU members (US$ thousand/ € thousand/ tonnes ), 1998-2000 1998 1999 2000 value US$ volume value US$ value E volume value US$ value E volume EU Total 3,077,099 689,716 2,956,854 2,789,485 698,844 2,643,170 2,873,011 602,067o.w. Kenya 124,871 29,907 139,312 131,426 35,982 141,612 153,926 40,680

Kenya/NL 83,859 21,075 91,445 86,269 25,948 92,277 100,301 29,045 Kenya/UK 23,344 4,896 31,838 30,036 6,740 34,744 37,765 8,167

Kenya/GER 12,522 3,198 10,664 10,060 2,548 10,762 11,698 2,879 Kenya/FR 2,146 297 3,144 2,966 401 2,520 2,739 356

Kenya/Other EU 3,000 441 2,221 2,095 345 1,309 1,423 233 The role of the middleman in Kenya’s success has been vital. Two of the large flower producers illustrate two approaches to production, marketing and distribution. Homegrown Kenya Ltd has direct linkages to UK retailers, while Oserian Flowers has opted to link itself tightly to the dominant Dutch flower auction system. As Kenyan small-holders, growers operating between 1 and 10 hectares, tend to market to brokers linked to the Dutch flower auctions, we begin with Oserian. Oserian Development Co. Ltd, part of the Oserian Group of companies, is owned by Netherlands expatriates. It has 200 hectares of land in flowers on the southern shore of Lake Naivasha, Kenya. The flowers are grown in two areas, the main farm located on the south-western shore of Lake Naivasha and the Backlands farm which is located further south, close to the northern part of the Olkaria Geothermal field. It employs up to 5,600 workers. Oserian exports some 250 million stems a year through markets in Holland and England. It is the world's largest grower of statice, a flower in great demand for floral arrangements. In an attempt to control airfreight costs and schedules, Oserian founded East African Flowers b.v. (EAF) in 1984. EAF’s core service is the air-freighting of

cut flowers from Africa to the Netherlands where it expertly unpacks them and prepares them for sale and distribution. There is a 3,200 ft unpaved runway in operation near the Oserian holdings.

In 1993, Oserian decided to establish its own tissue culture laboratory, believing it could reduce costs even though considerable investment was required. It now believes it has cut these costs by a third from what it cost to import similar planting materials, and it has considerable extra capacity to do contract work for other firms. The Kenya Agricultural Research Institute (KARI) already had such a lab, where some Oserian workers were trained before the Oserian facility was set up. KARI scientists helped to plan the company's lab and helped it obtain the needed materials. Now, KARI shares in the proceeds from Oserian's exports of flowers developed through tissue culture. In 1994, EAF’s management decided to complement their importing activities by developing their own auctioning system for the cut flowers grown in Africa, and set up the Tele Flower Auction b.v. (TFA). It constructed a logistical and trading floor of 9,000 M2 in The Netherlands to house EAF’s operations



and TFA’s highly automated auction service. TFA was one of the first computerised auctions, operating without the physical transfer of flowers past the auction clock. The auctioning is done through a computer network and the buyers are selected amongst the 100 biggest Netherlands wholesalers. TFA does not impose any quantitative restrictions on imports and it buys on a contract basis. Supply criteria and commissions are comparable with the traditional auctions. Several hundred buyers of flowers use this unique facility, which TFA can provide both at its own headquarters and onsite at the buyer’s offices. This unique sales and distribution formula has also proved to be a great success from the production point of view too. East African Flowers and the Tele Flower Auction now represent the European interests of nearly fifty top growers of cut flowers located in Kenya, Tanzania, Zimbabwe, Zambia and Uganda. In 1999, TFA added various rose varieties grown by top Dutch growers to its range of African roses. The financial management teams for both East African Flowers and Tele Flower Auction operations are located in Kenya. All the Oserian-affiliated companies were founded by Dutch entrepreneurs. To these they added Airflo to provide refrigerated air freight. Airflo’s office is located at Nairobi Airport, where the company has cooling and storage facilities that have been designed to provide an optimum storage environment. Airflo takes an active role during and after the ten-hour flight to Amsterdam, supervising the unloading of the cooled cut flowers and the processing of the customs formalities, as well as the road

transportation from the platform at Amsterdam Schiphol Airport to EAF’s unpacking rooms in Amstelveen or directly to one of the four major Dutch flower auctions. Oserian also deals with the UK through World Flower, its UK marketing subsidiary. This company distributes, for example, the 42mln rose stems produced annually by Finlays in greenhouses on part of its tea estates in the Western Highlands at Kericho directly to UK supermarkets. Rod Evans is Chairman both of the Kenya Flower Council, and of Homegrown Kenya Limited, which is part of Flamingo Holdings. Arising from the formation of Homegrown in Kenya more than 20 years ago, Flamingo Holdings is a British company established in 2000. Homegrown Kenya Ltd takes a different approach to the market. It buys rather than owning its links in the supply chain between production and buyer. Rather than selling through the Dutch auctions, however, Homegrown sells through its affiliate companies in Britain and Africa to retail distributors in Britain. Homegrown’s two UK distributors are Flamingo UK (Martin Hudson, managing director, annual turnover of £30m on flowers) located at Hemel Hempstead. It distributes pre-pack and prepared vegetables to supermarkets, including Marks and Spencer, Safeway, Sainsburys and Tesco. Flower Plus supplies cut flowers to Marks & Spencer from a site at Spalding Lincolnshire. Dudutech, an Integrated Pest Management company set up by Homegrown, was also moved into the Group in 2001. In 2002 two further companies were acquired: Zwetsloots, a cutflower supplier to the supermarkets,



and Sulmac, a major grower of cutflowers and vegetables in Kenya. Sulmac now trades as Kingsholme Ltd, consolidating product through Homegrown to the distribution companies in the UK. In 2003 the Group also acquired Sunbird Flowers in South Africa to enhance its vertically integrated supply base. Sunbird Flowers operates as Flamingo Flowers Pty supplying chrysanthemums to the UK and bouquets to Woolworths South Africa. 77% of the shareholding of the Group is owned by the staff with 14% held by CDC Capital Partners London and the balance of 9% by the Modern Africa Fund based in Washington USA. The Group employs some 7,000 staff worldwide and has a turnover in FY 02/03 of £160 million The first prepack depot (for strawberries) was at Flamingo farm in the late 1980’s, followed by a french bean prepacking operation located some 800m from the Nairobi Airport aircraft apron. This airport depot was expanded into an airfreight handling facility in 1988 and the prepack factory developed into a major production unit handling product from Homegrown farms and outgrowers by the early 1990’s. Subsequently a 'high care' factory to EU standards was built, washing and preparing a range of vegetables and salads, including sliced runner beans and fresh peas. This first prepared factory was adjacent to the original prepack depot where 'low care' handling and vegetable prep was undertaken. These facilities were later augmented by the construction of a second state of the art prepared facility including 'low care' and 'high care' units suitable for salad and vegetable processing. Cooling is undertaken through a Glycol system meeting all current environmental requirements.

In Kenya, Homegrown also works with approximately 1,000 smallholder suppliers or 'outgrowers'. The small farms are clustered in two main groups around the towns of Thika to the north of Nairobi and Machakos to the south. The farms can be as small as 500m2 in the hills around Machakos but tend to be a little larger in the area around Thika. Homegrown provides full support to these outgrowers, including seed, technical expertise and training that they need to produce a high quality product. They adhere to a custom designed Code of Practice (COP) drawn up by Homegrown and auditing is undertaken by a Crop Development Unit staffed by trained Kenyan university graduates. The COP meets EU standards on issues such as crop husbandry and hygiene. Homegrown’s outgrowers specialise in baby corn, and fine and extra-fine beans. Depending on the size of the farms, they are grouped into small clusters that are responsible for consolidation, grading and quality control. The fresh product is then collected daily by Homegrown and taken back to the main Nairobi depots for cooling and further grading and preparation. This intervention in the rural areas, providing advice and a market for smallholders, is both sustainable and replicable with over US$3m annually being injected into these rural economies under Homegrown supervision. It also provides a sense of pride in families as well as supplying funds for outlays such as education ensuring a continuous improvement in standards of living.

D.3.b.Vegetables

a. recent market trends over time, including in terms of



value, volume, and market growth, and identify market niches and growth/export potentials;

b. present degree of market competition, including leaders and followers, and the structure/nature of the market;

c. Kenya exporters’ position in

the international market;

d. specific factors required for Kenya producers to compete in each of these markets, including product quality or required processing standards, in the context of AGOA, EBA, or EAC trade opportunities.

D.3.c. Fruits

a. recent market trends over time, including in terms of value, volume, and market growth, and identify market niches and growth/export potentials;

b. present degree of market competition, including leaders and followers, and the structure/nature of the market;

c. Kenya exporters’ position in

the international market;

d. specific factors required for Kenya producers to compete in each of these markets, including product quality or required processing standards, in the context of AGOA,

EBA, or EAC trade opportunities.

D.4. Textiles Sector World Market: The textiles, clothing, leather and footwear (TCF) sectors are among the most globalized. The distribution of production, trade and employment has changed dramatically over the years. Asia dominates the world production of textiles, followed by the Americas and Europe. Between 1980 and 1995, the textile output in Asia rose by 98% while it fell in Europe by 32%. In clothing, Asia's world position is even stronger. In 1998, Asia, for the first time, accounted for more than 50% of the world's output and its share has increased since then. Western Europe remains the largest exporter of textiles, but Asia has become the world's largest exporter of clothing with about 44% of the world total by the year 2000. China has become the largest exporter of textiles and clothing in the world and the top employer in the TCF industries. After suffering a global decline of 16% during the 1980s, employment in the production of the textiles, clothing and footwear remained stable (with approximately 30 million jobs in the formal sector) throughout the 1990s. However, the geographical distribution of jobs has shifted dramatically towards Asia with China emerging as the new tiger of TCF industries. The analysis of trends in TCF production, trade and employment highlights a number of constant factors as well as certain new developments. The constants include the growing overall importance of the developing countries as employers and suppliers for the world market of TCF



products and within that group, the steady rise of emerging countries. As indicated before, Asia is the continent that has benefited most from successive waves of relocations. However, despite the scale of changes linked to relocations of production centers at a global level, among the industrialized countries (the major losers in terms of employment and market shares) some countries have developed "niche" markets with high value added which have remained viable despite greater international competition. Apart from these constants, recent changes have shed light on some relatively new trends. Some relocations have come about as a result of the desire of manufacturers to establish a presence within free trade zones in order to circumvent tariff barriers. Rising production and exports in certain countries close to the major centers of consumption of TCF products can be explained by the increased need for flexibility to adapt to a changing demand. It is also clear that labor costs, although important in the global relocation strategies for the labor-intensive segments of the production process, have lost ground as the determinant factor of international competitiveness. It is now more important to be able to produce the quality required "just in time ", than to offer the cheapest labor cost. Kenya: The Kenyan textiles sector is based on several raw material inputs, including cotton and wool, transformational industries and linkages to export markets. The AGOA is the most recent external factor that has acted to change the Kenyan textiles and garments industries. The Kenyan textile industry once employed over 65,000 workers. By mid

1993, there were over 70 bonded manufacturing (MUB) firms producing garments and household textiles for the US market. However, the effort to stabilize the economy with high interest rates in the aftermath of the 1992 election related money printing reversed all the gains in macroeconomic competitiveness. Labor costs rose sharply from 1994, and by 1997, the average manufacturing wage, in US dollar terms, had doubled. Unable to compete, some export firms resorted to transhipment of garments, prompting the U.S trade authorities to impose a punitive reduction of Kenya's export quota in 1994. By 1997, most of them had closed down. By 2000 there were only 7,000 on the Kenyan textiles sector payroll, working for 24 private-owned textile industries. All the 35 government-owned industries had closed. Passage of the U.S. Africa Growth and Opportunity Act in May 2000 has revived this sector. AGOA allows duty-free export of most products from Africa to the US. The AGOA II legislation of 2002 focused on the textile industry and extended the range of textiles qualifying for duty-free trade. Apparel assembled in African countries must be made from yarn or fabric originating in the US or Africa. Lesser Developed Countries (countries with GDP/capita of less than $1500 in 1998, i.e. 42 SSA countries, including Kenya) are granted duty-free and quota-free benefits for apparel made with yarn or fabric originating outside Africa or the US until September 2004. In 2004, when the allowance on clothes made from non-local or non-US sourced fabric expires, it will most likely lead to factory closures since fabric is currently sourced mostly from Asia at very competitive prices. The US Congress is considering an extension of this deadline. Additionally, Africa will be exposed to greater competition from



other developing countries in the apparel industry when the Multi-Fiber Agreement (MFA) quotas agreed to under the Uruguay Round are dismantled in 2005. Kenya's qualifying exports to the US in less than half of the current year, 2003, have already surpassed the $59 million total for all of 2001. That was the first full year of operation for the Africa Growth and Opportunity Act. According to the Kenyan Ministry of Trade and Industry, textile and apparel exports to the US rose from $45 million in 2000 (before AGOA) to $123 million in 2002. From January to May of 2003, Kenya shipped $76.4 million worth of goods to the US through AGOA and another preferential program that eliminates Customs duties on products from eligible countries. Total new AGOA-related investment has gone from $15.3 million in 2000 to $77.1 million in 2002. Eighteen new companies exporting under AGOA started operations in 2002, all garments or related services. Direct AGOA-related jobs now number almost $30,000. The current trend also puts Kenyan traders on course for greatly exceeding the $129 million in AGOA-eligible goods they sold to the United States in 2002. Textiles and clothing account for most of the exports under the trade scheme Recent market trends over time, including in terms of value, volume, and market growth, and identify market niches and growth/export potentials; As an LDC, Kenya is free to transform yarn from any supplier. Kenya's textile industry currently imports most of its raw materials from Asian countries. Kenyan clothing firms produce garments for international brands such as jeans labels

Lee and Wrangler, and fashion house Tommy Hilfiger. In practice, U.S. buyers dictate to the Kenyan manufacturers their suppliers of raw materials and the prices they will charge the Kenyan cut and sew manufacturers, which add value only in garment assembly and finishing. With their pricing controlled by the prevailing world market price available to U.S. buyers, local demand for locally produced and converted yarns and threads does not appear to exert a demand pull on the cotton fiber producers. As many as 40 cut and sew companies have been established in Kenya, with China, Korea and India dominating the East Asian fabric market. D.4.a. Cotton With world cotton consumption running ahead and exceeding production for a second straight year, cotton prices are forecast to rise in lock step, advancing by roughly 15% for the 2003/04 cotton year, to US$.064 a pound, up from US$0.56 a year ago. That upward move will take prices up by more than 52% over the past two years, from just US$0.42 in 2002. During the 2002/03 cotton year just ended, prices surged by a third, to US$0.56 a pound from US$0.42. The International Cotton Advisory Council (ICAC), a world consortium of cotton growers, said cotton consumption this year is forecast to rise to 21.2 million tons, exceeding production -- pegged at 20.2 million tons -- by almost 5%. Given the stepped-up demand, ending stocks, which decreased by 1.8 million tons last year, are forecast to shrink by another million tons this year, to their lowest level in the past nine cotton growing seasons.



But with higher cotton prices driving increased production, cotton prices are expected to moderate in 2004/05, declining to US$0.61 a pound, as production starts to catch up with demand, the ICAC forecast. Driving much of the stepped-up demand for cotton is China, where bad weather is forecast to hurt this year's cotton crop, forcing China to import more. Imports by China are now expected to jump up by more than 28% this year, to 900,000 tons form 700,000 tons last year. Kenya: The Kenyan market has some 77 ginneries that have an aggregate throughput capacity of 140,000 bales of cotton. In 2001, the Kenyan cotton farmers produced X bales; in 2002 30,000 bales and the 2003 crop appears to be 50,000 bales, or 36% of domestic demand.

Current production is less than required to satisfy local demand for greige goods as inputs to textiles products. Discussion in the press, reflecting the views of the ginnery owners and the manufacturers, indicates that farmers are not planting cotton in reaction to the low market price for cotton delivered to ginneries. One owner has proposed that the solution will be found in a Kenyan Government market intervention, including price supports and undefined “protection”.

Some production problems can be traced to the collapse of a major irrigation project. In 1952, the Tana River District of Coast Province began irrigating 12,000 acres exploited by 600 farmers. By the 1980s, these lands produced 65% of domestic demand for raw cotton. In 1989 the irrigation project collapsed. In 1995, a local investor, Ali Islam of Hola

Ginneries, proposed that the National Irrigation Board revive the project. A technical study by the Sudanese consultancy GIBB, supported by a $400,000 grant by the BADEA, has identified several water intake points and an irrigation canal design.

Kenya's once-vibrant cotton farming sector collapsed in the 1990s as cotton prices fell worldwide. The US has pledged more than $300m in aid to Kenyan farmers to help revitalise the industry

Another factor influencing local conversion of cotton fiber into greige goods is the third country fabric rules of the AGOA. US buyers name the suppliers of raw materials and the prices they will charge the Kenyan cut and sew manufacturers, which add value only in garment assembly and finishing. With their pricing controlled by the prevailing world market price available to US buyers, local demand for locally produced and converted yarns and threads does not appear to exert a demand pull on the cotton fiber producers. D.4.b. Wool Production

Kenya had a tradition of wool production in Uasin Gishu, Keiyo, Marakwet, West Pokot and Nandi districtions. Wool production in the region declined some years ago and herders dropped out of the market in reaction to marketing problems and unattractive prices. One Eldoret-based textile mill, recently purchased by new investors, has a daily capacity of 10 Tons, but is receiving between 100 and 1,000 kg of wool a day from the local herders.

a. present degree of market

competition, including leaders and



followers, and the structure/nature of the market;

The number of manufacturers and producers a. Kenya exporters’ position in the

international market; b. specific factors required for Kenya

producers to compete in each of these markets, including product quality or required processing standards, in the context of AGOA, EBA, or EAC trade opportunities.



D.5. Garments Sector Kenya’s exports of textiles and apparel increased by some 21% in 2001 compared to 2000. Although the sector has suffered from lack of additional investment in the last decade, it remains relatively active and continues to export. Even with only limited foreign direct investment (FDI) of Asian origin, the garment industry should constitute an area of special focus in the recovery strategy. The garment sector combines high potential for rapid employment creation, foreign investment, export earnings, transformation of the MSE sector through linkages with external markets, and backward integration into agriculture. The African Growth and Opportunity Act (AGOA) was passed by the U.S. Congress in May 2000. AGOA allows duty-free export of most products from Africa to the US. The AGOA II legislation of 2002 focused on the textile industry and extended the range of textiles qualifying for duty-free trade. Apparel assembled in African countries must be made from yarn or fabric originating in the US or Africa. However, Lesser Developed Countries (countries with GDP/capita of less than $1500 in 1998, i.e. 42 SSA countries) are granted duty-free and quota-free benefits for apparel made with yarn or fabric originating outside Africa or the US until September 2004. A study for the IFC published in June 2002 by Vista Capital Ltd15 before the national elections of December 2002, found that, “while the Africa Growth and Opportunity Act has acted to stimulate investment in the garment manufacturing areas, most of the investment to date

15 “Market Survey to Determine Investment Trends in Kenya over the Period 1999 – 2001,” Vista Capital Limited, June 2002, Nairobi

[June 2002] has been below the stipulated US$ 5 million level. One major exception is the Indigo Group of Companies that are constructing an EPZ zone in addition to making an investment in their own manufacturing operations. However, several projects that are over this limit are said to be pending. Most of these investments are being sponsored by foreign investors from either the Middle East, India or China.” Export to the US of textiles and apparel was the fastest growing AGOA sector in 2002. After 2004, most African countries will look to South Africa for the cheapest source of textiles according to a recent IMF Working Paper.16 This labor-intensive industry is seen as the best way for AGOA to make an impact on the lives of poorer Africans with the creation of jobs. In 2004, when the allowance on clothes made from non-local or non-US sourced fabric expires, it will most likely lead to factory closures since fabric is currently sourced mostly from Asia at very competitive prices. The US Congress is considering an extension of this deadline. Additionally, Africa will be exposed to greater competition from other developing countries in the apparel industry when the Multi-Fiber Agreement (MFA) quotas agreed to under the Uruguay Round are dismantled in 2005. Kenyan textile exports have risen since the act was passed, but the industry has a long way to go before it can make 16 Additya Mattoo, Devesh Roy, and Arvind Subramanian, The Africa Growth and Opportunity Act and Its Rules of Origin: Generosity Undermined?, International Monetary Fund, WP/02/158, September 2002. http://www.imf.org/external/pubs/ft/wp/2002/wp02158.pdf



clothing entirely from local yarns, according to Jaswinder Bedi, chairman of the Kenya Apparel Exporters' Association (KAEA). Kenya's textile industry currently imports most of its raw materials from Asian countries. AGOA’s Impact on Kenya: Kenya recorded $129 million in AGOA exports in 2002 according to the latest Office of the US Trade Representative report on AGOA.17 According to the Kenyan Ministry of Trade and Industry, textile and apparel exports to the US have risen from $45 million in 2000 (before AGOA) to $123 million in 2002. Total new AGOA-related investment has gone from $15.3 million in 2000 to $77.1 million in 2002. Eighteen new companies exporting under AGOA started operations in 2002, all garments or related services. Direct AGOA-related jobs now number almost 30,000.

Recent market trends over time, including in terms of value, volume, and market growth, and identify market niches and growth/export potentials. While AGOA can be credited with the stimulation of 30,000 new jobs, they have come in relatively low-wage Cut and Sew companies. These companies are not able to determine their price structure. US buyers often specify fabric suppliers and determine the price to the Kenya C&S company. The unit price for finished goods is determined by the world market, which is dominated by China and other low wage areas. The price per finished piece was $4.82 in 2001, $4.32 in 2002 and

17 2003 Comprehensive Report on US Trade and Investment Policy Toward Sub-Saharan Africa and the Implementation of the African Growth and Opportunity Act, Office of the US Trade Representative, May 2003. http://www.ustr.gov/reports/2003agoa.pdf

$4.26 in 2003. Since raw materials account for 65% of the cost structure, and C&S companies cannot control these costs or prices, profit must be found in labor or capital productivity. Research18 has shown that the Textile and Garments sectors firms in general are less inclined to make investments in physical capital than are firms in other sectors, and that investment correlates positively with firm size. The wages for the Textile sector

a. present degree of market

competition, including leaders and followers, and the structure/nature of the market;

b. Kenya exporters’ position in the

international market; c. specific factors required for Kenya

producers to compete in each of these markets, including product quality or required processing standards, in the context of AGOA, EBA, or EAC trade opportunities.

18 Soderbom, Mans – Constraints and Opportunities in Kenyan Manufacturing: Report on the Kenyan Manufacturing Enterprise Survey 2000; UNIDO September 2001.



E. Infrastructure Factors

E.1. Finance and Access to Capital

Formal Finance

The Kenyan banking system is supervised by the Central Bank of Kenya (CBK) and consists of 47 banks and five nonblank financial institutions (NBFIs), including two mortgage finance companies. There are also four building societies and 47 foreign exchange bureaus. The four largest banks in Kenya account for over 55% of gross assets in the system and a similar share of deposits. Two of the four largest banks, the Kenya Commercial Bank (KCB) and the National Bank of Kenya (NBK), are partially Government-owned, although the divesture of its 35% equity stake in KCB to an ‘anchor’ investor is slated for the short-term, and the other two are majority foreign-owned (Barclays Bank and Standard Chartered). Most of the many smaller banks are family owned and operated. A brief survey of previous work, relevant to Sub-Saharan countries, discloses that the main result of Biggs et al [1996], based on one year of Kenyan micro data, is that access to formal borrowing increases with firm size. Access to formal finance varies across firms. Firm status, firm size, and ethnic origin of the owner affect interest rates charged, how much collateral is required, and how the debt portfolio is composed. Formal firms borrow a lot more than do informal firms. The mean informal firm only borrows 0.4% of what the mean formal firm does. For the formal firms, 36 % of external finance comes from short-term borrowing such as overdraft facilities. Long-term borrowing from commercial banks and non-bank financial institutions [NBFIs] constitutes 20% of a

formal firm’s debt portfolio. Corresponding figures for informal firms are seven and 10%, respectively. Compared with Micro and Small firms, relatively large firms [Medium and Large], among formal firms, tend to hold relatively large shares of external finance in short-term borrowing [between 37 and 40%]. Somewhat surprisingly, however, Micro firms have the largest share of long-term borrowing [27%], although in absolute terms the amount is, of course, very small. The share of long-term borrowing for the other size groups is in the vicinity of 20%.

Informal Financing

E.2. Transport

At the September 25 and 27 2003 meeting of the East African Business Summit in Nanyuki, The Chairman of the East African Community, Mr, Amanya Mshenga, expressed concern that the region was dragging its feet in integrating key areas particularly transport and infrastructure. He warned that unless the region moved faster to integrate, it risked being "technically landlocked". Why, he asked, was it cheaper to move a container from Europe to Mombasa than it is to move the same from Mombasa to Eldoret? Because of this, he said, businesses were finding it cheaper to import through Durban, South Africa, instead of using their own ports. A survey carried by the Nation (Tuesday, October 14, 2003 “Minister roots for co-op societies”) indicated that middlemen buy a bag of mangoes in Marakwet District at Ksh150 and sell the same at between Ksh500 and Ksh600 in Eldoret, Kitale, Kabarnet, Nakuru and other towns. Businessman Tom Tum told the



Nation he preferred Kerio Valley mangoes because they fetched good prices in towns. "We buy a bag at Ksh150 and sell to our ready markets at Ksh500," he said. Mr Tum, however, denied that they were exploiting the farmers, saying they incurred huge transport costs because the roads were in bad state. Another businessman, Mr James Njoroge, said he spent an average of Ksh30,000 (or 86 bags of mangoes, net) per week to repair a vehicle he hires due to the poor Biretwo-Chesegon road.

E.3. Regulation and Licensing.

Kenya's bureaucracy remains significantly burdensome. The Economist Intelligence Unit reports that "investors should be aware that the official register is in a deplorable state; it has never been computerized or properly updated." Obtaining licenses can also be a challenge. In 1999, the government updated the Local Government Act in an effort to streamline the bureaucracy, creating what the same source calls a "single business permit in place of a multitude of different licenses." The government gives local authorities "discretion to choose the appropriate schedule of fees to charge, depending on the size and level of development of the local authority concerned"; but businesses complain that, because of this discretion, they sometimes have to "pay more for a single business permit than they have paid before for many trading licenses." The convoluted bureaucratic structure has bred pervasive corruption. Transparency International reports that "bribing police officers is the most rampant practice…. [T]he Nairobi City Council ranks second [on the bribery scale]…. Telkom Kenya ranks third…the Provincial Administration fourth, and Kenya Power & Lighting Company fifth."

E.4. Insurance In The Kenyan Market The market is going through a period of intense competition, due both to the large number of companies and also because of cheap reinsurance. Non-life business represents over 75% of all income, of which motor accounts for nearly 50%. Principal Legislation And Supervision Insurance in Kenya is controlled by the Insurance Act of 1 January 1987. Compulsory Insurance

• Motor third party liability insurance

• Aviation liability • Marine cargo imports

Tariff Classes The insurance association has issued rating guidelines for certain classes. Premium Taxes and Charges A 1.5% tax is levied on gross premiums, in addition to a stamp tax of KES 4. There is also a training levy of 0.2% that supports the College of Insurance, and a reinsurance tax of 5% of gross premiums ceded abroad. Insurance Authorities The supervisory authority is the Department of Insurance at the Ministry of Finance. The insurance association is the Association of Kenyan Insurers. Admitted / Non-admitted Kenyan insurance must be placed with a Kenyan registered insurer, although exception is allowed for export cargo or reinsurance business that has been approved by the commissioner of insurance. Reinsurers do not have to be admitted or put up deposits but are usually vetted by the commissioner of insurance.



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Kenya Value Chain and Competitiveness Analysis … Desk Study...Kenya Value Chain and Competitiveness Analysis Volume 1: Market Analysis Global Development Solutions, LLC 3 Table of