Remove State from fertiliser subsidy – Business Daily
We must wait and see whether the fertiliser subsidy programme announced by President William Ruto on his inauguration day will make the desired impact this time around. We have had a fertiliser subsidy programme since 2009.
The initial idea was that the government would purchase the product straight from manufacturers- and therefore- get good bargains from bulk purchases.
In retrospect, the first mistake to happen was to allow the bureaucracy at Kilimo House and the commodity marketing monopoly, the National Cereal Board (NCPB) to take charge of procurement of subsidised fertiliser.
Tenders are always bogged down by controversies and allegations of corruption while the number of disputes that end up at the Procurement Appeals Tribunal keeps rising, perhaps a sign of capture of the fertiliser subsidy programme by greedy elites.
The irony of it all was that –on a number of occasions- private sector dealers and importers were landing fertiliser in Mombasa at prices that were cheaper than the price at which traders contracted by the government to purchase subsidised fertiliser on behalf of the government were landing the product at the port.
The inability by the state to deliver an efficient and transparent fertiliser subsidy programme is well illustrated by the current plan where the government announced that it had set aside Sh5.7 billion for the programme. DAP, the main fertiliser for planting, was to be sold at Sh2,800 per bag compared to the market price of Sh6,000 for the same quantity.
Consequently, NCPB put out a tender to supply it with fertiliser and after which it proceeded to give agency contracts to a few importers. The arrangement is that once you are contracted, you deliver the product to any NCPB depot and are paid on a consignment basis – in other words, after you product has been sold to a registered farmer.
Even after agency contracts were doled out, most importers opted out because first, NCPB’s creditworthiness, and second the risk of losing product stored in NCPB depots.
The upshot is that to date, only a handful of importers are participating in the fertiliser subsidy programme. It is one thing to offer cheap fertiliser and another to make it available to farmers all the time.
The programme that ran in 2016 was a total disaster. The government roped in the Kenya Commercial Bank to open letters of credit to NCPB on the understanding that the credit would be settled later.
Today, the debt by NCPB in respect of the fertiliser subsidy programme is one of the biggest non-performing loans on the books of KCB. Debts owed to the fertiliser contractor- the entity known as Export Trading Ltd, have accumulated to billions.
Five years ago, that contractor went to court and was awarded more billions. The award is yet to be settled.
Global fertiliser prices started skyrocketing in the third quarter of 2020 only to be exacerbated by the war between Russian and Ukraine that disrupted these two key players in the international fertiliser supply chain. With our national consumption at around 7,000 metric tonnes per annum, we are small players. Indeed, Kenya is a mere price taker in the game.
On a positive note, the latest indications would appear to suggest that prices are beginning to trend downwards. Last week, an international tender In Tanzania came up with a price of $ 830 per metric tonne.
The latest shipment to Kenya arrived at the port of Mombasa at $ 915. Recently, the Russians managed to dodge international trade sanctions and sold 88,000 tonnes of fertiliser to the Kenya Tea Development Authority.
Even though I hold the view that subsidies tend to distort markets, I support the case for a transparently run and depoliticised subsidy programme run by the private sector.
As long as the programme is run by the Ministry of Agriculture and NCPB, the programme will remain in the capture of well-connected commodity traders and their political godfathers.
I read somewhere how the government of Nigeria had been running a large state-controlled fertiliser subsidy programme since the 1970s. They reached a point where the subsidy was consuming 56 per cent of the federal government’s capital spending.
Despite the considerable fiscal burden, actual use of fertiliser by small scale farmers had not changed substantially. The system was bedevilled by wide-scale corruption.
For instance, it was discovered that massive diversion of supplies was taking place, only benefitting middlemen and rent seekers. Subsidised fertiliser was routinely smuggled to neighbouring countries.
What did the Nigerians do? They depoliticised the plan by removing the state from procurement and distribution of subsidised fertiliser.