Why tea farmers are set for little or no bonuses this year

The pain of Kenyan tea farmers just got worse with stocks of their produce worth Sh14 billion now stuck in warehouses due to the Covid-19 pandemic. And this as it emerged that their factories have a debt of Sh4.8 billion.

But what might worry farmers even more is a deficit of Sh16.8 billion, which was revealed in a leaked board paper sent to various factories from the headquarters.

The Kenya Tea Development Agency (KTDA), which runs a huge chunk of the tea sector, is also grappling with how to explain to over 620,000 farmers in its stable that they should expect poorer pay on a year when they have delivered the most tea to its factories.

GOOD RAINS

KTDA argues that even though the year was blessed with good rains, which saw tea volumes grow by nearly a third, a combination of factors beyond its control due to the health crisis, among them global lockdowns, increasing competition and low auction prices, have conspired to deny farmers a similar jump in their earnings.

“By the time we closed our financial year (on June 30, 2020), we had tea worth Sh14 billion locked in our warehouses. This is tea in our warehouses and will be sold,” Mr Benson Ngari, the KTDA finance and strategy director, told the Nation in an interview last week. The tea will be exported once the market opens fully, he added. Kenya exports more than 95 per cent of its tea.

The agency has also moved to calm fears that farmers will not get their bonuses this year, saying that the decision has not been made.

“The 54 tea factories managed by KTDA are yet to close their financial books for the year ending June 30, 2020. In this regard, there has been no communication from the tea factories to their farmers regarding the final payment commonly known as bonus,” KTDA said in a statement released last week.

“Absence of this, any pronouncement in this regard is mere speculation. The tea factories will communicate to their stakeholders, in their usual manner, at the appropriate time,” the statement adds.

However, KTDA has already started informing farmers at the grassroots to prepare for a bad year as part of its stakeholder management.

WORKING CAPITAL

This comes on the back of the leaked board paper which has, for the first time, given a rare peek into the financial health of tea factories run by the agency. The document gives a breakdown of how much each factory is indebted and their deficits as well as their working capital loans as of May 2020. In total, all the factories are highly indebted with loans worth Sh4.8 billion.

Worse, the document says some factories have very weak balance sheets that have ‘extremely diluted ratios’, which means that unless they cut dividends or get new loans, they will go bust.

The paper has also projected total deficits to hit Sh17 billion by the time the second payment of green leaf is due, feeding into fears that farmers may not get their October bonuses, which is one of the most watched event in the tea sector.

But KTDA top managers at the head office in Nairobi last week disowned the board paper and said it did not have the name of the finance director who wrote it. Nevertheless, the document has been shared with several managers, among them regional accountants and factory unit managers.

The paper is a ‘clarion call’ by the KTDA management services Limited, the firm that manages all tea factories, asking them to retain working capital to build healthier balance sheets.

It recommends a general retention of Sh3 per kilo of green leaf for factories with large deficits of above Sh100 million and Sh2 per kilo for those with lower deficits.

“These retentions will be expected to be implemented for the next three years or until the deficits are reversed. The retained earnings will be in-built into the annual accounts and will be treated as capital and shares issued to the shareholders at the end of every year starting this financial year,” the paper adds.

Though retention of capital is a good thing in boosting books of companies and offers them cheaper finance to run their operations, it takes away money meant for shareholders, who in this case are more than 620,000 farmers.

In the board paper, the KTDA management services company notes that the tea business is currently going through very difficult and unprecedented times due to various factors, among them delays by banks to disburse loans to the companies to bridge the deficit projected at Sh16.8 billion as at May 2020.

INTERNAL BORROWING

“You are probably aware that a number of factories which had significant working capital deficits signed resolutions to source for this capital from local banks and financial institutions,” the board paper reads.

It also revealed that some companies with the severest of cash flow problems resorted to borrowing from one another to remain afloat as they wait for funding from banks.

“These deficits were funded through internal borrowing from other factories and KTDA group companies with positive reserves, pending the expected funding by banks and other financial institutions,” it reads.

In the absence of working capital financing, most of the borrowing factories have been unable to refund the borrowed funds to the lending factories and KTDA. The board paper shows that the working capital loans as at May stood at Sh897.9 million while the total loans for all the factories stand at Sh4.7 billion.

However, it is the huge deficit of Sh16.8 billion that should worry farmers. A board paper is a document prepared by managers of a company to be presented to the company’s board to persuade them to support some decision.

But ultimately, the decision lies with the board. KTDA has more than 54 factories under it and each of them have an independent board, which is required to provide oversight and make such decisions before they are implemented by the management.

The paper points out that the financing challenge has also been made worse by banks taking an ‘inordinate long time’ to consider their funding requests which it blames on bad press.

“Under normal circumstances, a positive decision would ordinarily have been made immediately and without undue conditions. We suspect that this slowdown may have been occasioned by negative media publicity, various court cases brought against KTDA, tea factories and their directors,” the document said.

FUNDING HEADACHE

KTDA has been a subject of in-depth coverage by the Nation in the recent past, which resulted in the formation of a task force to reform the behemoth.

But KTDA rushed to court and stopped the task force from starting its work on grounds of conflicts of interest amongst some of the ministerial appointees to the taskforce.

The funding headache comes at a time when there is an oversupply of both local and global tea, which has resulted to high stock levels while pushing down tea prices. High stock levels tie up billions of shillings.

The board paper has also blamed the dwindling fortunes of the sector to a higher monthly pay review implemented last year at a time when the country has seen a spike in production due to favourable weather.