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Glaring gaps in flour subsidy – Business Daily

On the cheap maize meal, methinks that the government has not designed the subsidy programme well. Instead of subsidising the finished product, namely, maize flour, why not introduce the subsidy at the point where the miller purchases maize? Why not target the raw material and not the end product?
The subsidy scheme would have been more transparent if the government was paying subsidy claims at the point the miller buys the maize.
By choosing to subsidise the finished product, the government is now forced to post low-level bureaucrats at all maize milling factories to monitor operations, determine actual costs, and calculate the amount of the subsidy claim each of the factories is entitled to be paid.
In the first place, those low-level bureaucrats the government has posted at milling factories are ill-prepared to do the complex cost accounting tasks we are asking them to do. Secondly, owners of milling plants deeply resent the presence of these government inspectors in the premises.
But perhaps the weakest link in the design of the subsidy programme is the fact that the government wants the millers to bear the burden of funding the subsidy. The arrangement is that claims are settled much later. A model where responsibility of funding the subsidy is left on the shoulder of the miller is bound to face major resistance.
Thirdly, this whole scheme is just too opaque because it is to the low-level government inspectors and ill-prepared cost accountants we must turn to calculate and determine details such as the tonnage of maize purchased by each miller, the cost of buying and transporting the maize, all other operational costs for each factory, their profit margins, and the subsidy claims they are entitled to.
Where is the incentive to force millers to purchase maize for the subsidised programme cheaply? Where is the incentive to force millers to reduce their general cost of operations?
In my view, the government may have inadvertently created a perfect environment for arbitrage and fraudulent subsidy claims. The grain business in this country is complex and murky.
My mind is still fresh with what happened during the maize scandal of 2010 when the government introduced subsidised maize meal for the urban poor only to discover much later that it had played right into the hands of the millers who found an opportunity to make super normal profits by selling maize meal meant for the urban poor to the rich. A well-intentioned maize subsidy programme was turned into a gravy train.
When you introduce parallel markets in a context where the market is more or less cornered by a few players, you create conditions for arbitrage.
In the past, maize subsidy programmes were implemented by the state-owned National Cereals and Produce Board releasing product to millers for processing and in the hope that the factories would then sell maize flour to consumers cheaply. It did not work.
Despite the fact that thousands of bags of subsidised maize were being poured into the market, consumer prices kept rising. The irony was that some of the prominent players in the shenanigans received political rewards.
Former Fafi MP Bare Shill, who had been adversely mentioned in a PriceWaterHousecoopers investigation on the maize scandal was appointed by Agriculture minister William Ruto as a director of NCPB. And Mr Mohammed Islam of the Mombasa Maize Millers fame whose name featured in the same report was also appointed a director of the NCPB by the minister.
The next time we are in trouble, the government should just get NCPB to sell subsidised maize directly to poor consumer through its extensive national network of 110 outlets. Majority of Kenyans living in rural areas and modest urban settlements do not consume processed and packed maize.
They grind it at posho mills.
Poor design is why most subsidy programs end up will allegations of corruption. The government fertilizer program that started in 2009 is a good example. It did not make and impact mainly because of arbitrage and diversion of product to Uganda.
A loan of Sh 4.5 billion the government t forced NCPB to take from a local commercial bank remains non performing to date.



Joseph Muongi

Financial.co.ke was founded by Mr. Joseph Muongi Kamau. He holds a Master of Science in Finance, Bachelors of Science in Actuarial Science and a Certificate of proficiencty in insurance. He's also the lead financial consultant.