82517 Agriculture and Environmental Services AGRIBUSINESS INDICATORS: Kenya January 2013 i Contents ABBREVIATIONS AND ACRONYMS ............................................................................................................ IV ACKNOWLEDGEMENTS ................................................................................................................................ VI EXECUTIVE SUMMARY ............................................................................................................................... VII 1. INTRODUCTION ........................................................................................................................................... 1 1.1 RATIONALE AND CONTEXTUAL FRAMEWORK FOR AGRIBUSINESS INDICATORS IN SUB-SAHARAN AFRICA .... 1 1.2 OVERVIEW OF THE KENYAN AGRICULTURAL SECTOR ................................................................................................ 2 1.3 AGRICULTURAL PRODUCTION TRENDS IN KENYA....................................................................................................... 4 2. ABI METHODOLOGY ................................................................................................................................... 5 2.1 DATA FOR THE STUDY ........................................................................................................................................................ 6 2.2 SUCCESS FACTORS AND INDICATORS FOR AGRIBUSINESS ........................................................................................... 7 3. FINDINGS ON THE SUCCESS FACTORS AND INDICATORS ................................................................ 7 3.1 ACCESS TO CRITICAL FACTORS OF PRODUCTION ......................................................................................................... 7 3.2 ENABLING ENVIRONMENT: ACCESS TO FINANCIAL SERVICES AND TRANSPORTATION .................................... 40 3.3 PUBLIC AND TRADE POLICIES AND THE ROLE OF CIVIL SOCIETY IN LEVERAGING AGRIBUSINESS ................ 66 4. CONCLUDING REMARKS .......................................................................................................................... 76 ANNEX 1: COST COMPONENTS OF IMPORTED FERTILIZERS IN KENYA ........................................ 83 ANNEX 3: INTERNATIONAL TRUNK ROADS ........................................................................................... 84 ANNEX 4: NATIONAL TRUNK ROADS ........................................................................................................ 84 ANNEX 5: STATUS OF SELECTED MINISTRY OF AGRICULTURE/SECTOR POLICY REFORMS (2011) ................................................................................................................................................................... 85 Tables TABLE 1: SUMMARY OF INDICATORS FOR ACCESS TO CERTIFIED SEED ....................................................................................... 10 TABLE 2: SUMMARY OF INDICATORS FOR ACCESS TO INORGANIC FERTILIZER BY FARMERS ................................................... 21 TABLE 3: FERTILIZER VALUE–COST RATIO ON MAIZE BY ECOLOGICAL ZONE, KENYA (1997–2010) ................................... 32 TABLE 4: NUTRIENT–OUTPUT PRICE RATIO (1997–2010) .............................................................................................................. 32 TABLE 5: SUMMARY OF INDICATORS ON ACCESS TO AGRICULTURAL MECHANIZATION (TRACTORS) IN KENYA ................ 34 TABLE 6: ESTIMATE OF TOTAL TRACTOR HORSEPOWER (HP) PER 100 SQUARE KILOMETERS IN KENYA, 2011 ................. 36 TABLE 7: AVERAGE COST OF HIRING TRACTORS FOR FARM OPERATIONS IN KENYA (2011/12)............................................ 37 TABLE 8: TYPES OF TRACTORS IMPORTED INTO KENYA (2004–10) ............................................................................................. 38 TABLE 9: AVERAGE USEFUL LIFE OF TRACTORS IN KENYA (2011/12) ........................................................................................ 39 TABLE 10: SUMMARY OF INDICATORS FOR ACCESS TO FINANCE .................................................................................................. 40 TABLE 11: DISTRIBUTION OF LOANS FROM COMMERCIAL BANKS BY SECTOR, 2010–11 .......................................................... 45 TABLE 12: NONPERFORMING LOANS FROM COMMERCIAL BANKS BY SECTOR, 2010–11.......................................................... 47 TABLE 13: INTEREST RATES FOR FINANCIAL PRODUCTS IN KENYA (2010–11) .......................................................................... 50 TABLE 14: REGIONAL DISTRIBUTION OF GRAIN STORAGE CAPACITY ......................................................................................... 52 TABLE 15: DEPTH OF CREDIT INFORMATION INDEX (0–6) ............................................................................................................ 54 TABLE 16: EFFECTIVENESS OF COLLATERAL AND BANKRUPTCY LAWS IN FACILITATING LENDING (0–10) ........................ 55 TABLE 17: SUMMARY OF INDICATORS FOR ROADS AND TRANSPORT IN KENYA ........................................................................ 55 TABLE 18: SUMMARY OF ROAD TRANSPORT COSTS ON CLASS A ROADS IN KENYA (2012) ...................................................... 61 TABLE 19: SUMMARY OF ROAD CONDITIONS IN KENYA (2010) .................................................................................................... 63 TABLE 20: KENYA’S LOGISTICS PERFORMANCE INDEX (LPI)....................................................................................................... 65 TABLE 21: SUMMARY OF INDICATORS FOR PUBLIC AND TRADE POLICIES AND ROLE OF CIVIL SOCIETY IN INFLUENCING AGRIBUSINESS IN KENYA............................................................................................................................................................ 66 TABLE 22: EXPENDITURE FOR THE MINISTRY OF AGRICULTURE (KSH MILLION) (2006/07–2010/11) ............................... 74 TABLE A1.1: COST COMPONENTS OF DAP AND UREA IMPORTED INTO KENYA (AT 2011 CURRENT PRICES) ..................... 83 ii TABLE A2.1: EXTENT AND CLASSES OF ROADS IN KENYA............................................................................................................. 84 TABLE A3.1: KENYA’S INTERNATIONAL TRUNK ROADS (CLASS A) .............................................................................................. 84 TABLE A4.1: KENYA’S NATIONAL TRUNK ROADS (CLASS B) ......................................................................................................... 84 TABLE A5.1: MINISTRY OF AGRICULTURE AND AGRICULTURAL SECTOR POLICY REFORMS AND STATUS (2011) ................ 85 Figures FIGURE 1: SHARE (%) OF AGRICULTURAL SUBSECTORS IN AGRICULTURAL GROSS DOMESTIC PRODUCT ............................... 2 FIGURE 2: TRENDS IN AGRICULTURAL AND ECONOMIC GROWTH, KENYA (2005–10) ............................................................... 3 FIGURE 3: ACTUAL VERSUS POTENTIAL MAIZE YIELDS (KG/HA) (2000–10)................................................................................. 8 FIGURE 4: AVERAGE MAIZE YIELD (T/HA) IN DIFFERENT PROVINCES (2004-2010) ................................................................... 9 FIGURE 5: SOURCES OF SEED FOR FARMERS IN KENYA (2010) ..................................................................................................... 12 FIGURE 6: QUANTITIES OF CERTIFIED SEED OF MAJOR CROPS DEMANDED AND SUPPLIED IN KENYA AND THE SUPPLY GAP*2010 ....................................................................................................................................................................................... 13 FIGURE 7: PERCENT OF MAIZE AREA PLANTED BY SEED TYPE (2000–2010) .............................................................................. 14 FIGURE 8: CERTIFIED SEED PRODUCTION (FORMAL SOURCES) VERSUS IMPORTS (2005–10) .................................................. 16 FIGURE 9: TRENDS IN CERTIFIED SEED IMPORTS, KENYA (2005–10) .......................................................................................... 17 FIGURE 10: NUMBER OF CERTIFIED AGRO-INPUT DEALERS IN KENYA (2003–12) ................................................................... 18 FIGURE 11: DISTRIBUTION OF COMMODITIES STOCKED BY AGRO-DEALERS............................................................................. 19 FIGURE 12: PROPORTION OF MAIZE SOLD TO DIFFERENT BUYERS BY DISTRICTS ..................................................................... 20 FIGURE 13: RATIO OF HYBRID MAIZE SEED PRICE TO THE MAIZE GRAIN PRICE ....................................................................... 21 FIGURE 14: FERTILIZER IMPORTS AND CONSUMPTION IN KENYA (2004/05–2010/11) .......................................................... 25 FIGURE 15: FERTILIZER CONSUMPTION (T) BY TYPE OF USE (2001–11) ...................................................................................... 26 FIGURE 16: FERTILIZER CONSUMPTION (%) BY TYPE OF USE (2001–11)..................................................................................... 26 FIGURE 17: FERTILIZER USE BY CROP CATEGORY AS A PERCENTAGE OF TOTAL USE, 2005/06–2010/11 ............................ 27 FIGURE 18: FERTILIZER APPLICATION RATES (KG/HA) BY AGRO-ECOLOGICAL ZONE (1997–2010) ..................................... 28 FIGURE 19: FERTILIZER USE PER HECTARE OF MAIZE AND ARABLE LAND (1997–2010) ......................................................... 29 FIGURE 20: PERCENTAGE OF FARMERS APPLYING FERTILIZER (1997–2011) ............................................................................. 29 FIGURE 21: TRENDS IN DISTANCE TRAVELED BY FARMERS AND FERTILIZER APPLICATION (1997–2010) ........................... 30 FIGURE 22: COST COMPONENTS OF FERTILIZER IN KENYA .......................................................................................................... 31 FIGURE 23: PRICES OF DIAMMONIUM PHOSPHATE (DAP) IN MOMBASA AND NAKURU (CONSTANT 2007 KSH PER 50-KG BAG) ................................................................................................................................................................................................ 33 FIGURE 24: TRACTOR IMPORTS, KENYA (2004–10) ......................................................................................................................... 38 FIGURE 25: SHARE OF CREDIT TO THE PRIVATE SECTOR (JULY 2011 TO JUNE 2012) ............................................................... 46 FIGURE 26: AGRICULTURAL LOANS AS PERCENTAGE OF TOTAL LOAN DISBURSEMENT BY COMMERCIAL BANKS .............. 46 FIGURE 27: NONPERFORMING LOANS (NPLS) FOR THE DIFFERENT REAL SECTORS, 2011 ..................................................... 48 FIGURE 28: DISTRIBUTION OF LOANS FROM KENYA COMMERCIAL BANK BY SECTOR (2011) ............................................... 49 FIGURE 29: GROWTH IN COMMERCIAL BANK BRANCHES, KENYA (2005–10) ............................................................................ 51 FIGURE 30: FINANCIAL INCLUSION (% OF ADULTS) IN KENYA IN RELATION TO OTHER COUNTRIES OF SUB-SAHARAN AFRICA ........................................................................................................................................................................................... 51 FIGURE 31: TYPICAL NCPB WAREHOUSE IN KENYA...................................................................................................................... 53 FIGURE 32: NORTHERN CORRIDOR LOGISTICS COST STRUCTURE (%) ........................................................................................ 61 FIGURE 33: COSTS (KSH AND US$) OF TRANSPORT FOR DIFFERENT ROAD NETWORKS IN KENYA (2011) .......................... 62 FIGURE 34: TEA PRODUCTIVITY (KG/HA) IN MAJOR TEA-GROWING COUNTRIES (2010) ......................................................... 69 FIGURE 35: PRODUCERS’ PRICE AND FOB/AUCTION PRICE ($/T) OF TEA IN KENYA (2007–11)........................................... 70 FIGURE 36: PRODUCERS’ SHARE OF THE FOB PRICE OF TEA IN KENYA (2007–11) ................................................................. 70 FIGURE 37: AGRICULTURAL EXPENDITURE AS A SHARE OF GOVERNMENT EXPENDITURE (1995–11) ................................. 72 FIGURE 38: BUDGET UTILIZATION TRENDS (2006/07–2010/11) ................................................................................................. 73 FIGURE 39: COMPOSITION OF PUBLIC EXPENDITURES ON AGRICULTURE IN KENYA (2006–10) ........................................... 73 iii Abbreviations and Acronyms ABI Agribusiness Indicators ADC Agricultural Development Cooperation AFC Agricultural Finance Cooperation AgGDP Agricultural gross domestic product AGMARK Agricultural Market Development AGRA Alliance for a Green Revolution in Africa ASCU Agricultural Sector Coordinating Unit ASDS Agricultural Sector Development Strategy AU African Union CAADP Comprehensive Africa Agriculture Development Program CAN Calcium ammonium nitrate CBK Central Bank of Kenya CIF Cost, insurance, and freight CNFA Citizens Network for Foreign Affairs CRB Credit Reference Bureau DAP Diammonium phosphate DTM Deposit-taking microfinance [institution] FAO Food and Agriculture Organization of the United Nations FBO Farmer-based organization FDI Foreign direct investment FOB Free on board GDP Gross domestic product GoK Government of Kenya ha Hectare HP Horsepower IDF Import Declaration Fee IFDC International Fertilizer Development Center ISTA International Seed Testing Association KARI Kenya Agricultural Research Institute KCB Kenya Commercial Bank KEPHIS Kenya Plant Health Inspectorate Service km Kilometer kmt kilometer-ton KNFAP Kenya National Federation of Agricultural Producers KPA Kenya Port Authority KSC Kenya Seed Company or Kenya Shippers Council Ksh Kenya shilling KSU Kenya Seed Unit KTA Kenya Transport Association KTDA Kenya Tea Development Authority iv LPI Logistics Performance Index m Million mi Miles MoA Ministry of Agriculture NCPB National Cereals Produce Board NGO Nongovernmental organization NPK Nitrogen, phosphorus, potassium (fertilizer) NPL Nonperforming loan OECD Organization for Economic Co-operation and Development RAI Rural Access Index SRA Strategy for Revitalizing Agriculture SSA Sub-Saharan Africa t Metric ton tkm Ton-kilometer VAT Value added tax VCR Value–cost ratio WRF Warehouse receipt financing v Acknowledgements This report, prepared by James Mbata of the Agriculture and Rural Development Department of the World Bank, is part of a series of reports on a study supported by the Bill and Melinda Gates Foundation to identify success factors and construct corresponding indicators to benchmark as well as leverage agribusiness development in sub-Saharan Africa. The report has benefited from the contributions of many individuals. The author is grateful to all of them and wishes particularly to acknowledge the input and support of several individuals, particularly at the data collection stage. Firstly, I would like to thank Andrew M. Karanja (Senior Agricultural Economist) and Elizabeth Wairimu Karuoya at the World Bank’s Country Management Unit in Nairobi for their help and support during different stages of the study. I am indeed very grateful. Secondly, I would like to thank the numerous stakeholders across Kenya’s broad and very sophisticated agribusiness industry who agreed to be interviewed for this study and shared information willingly and candidly. Particular thanks are due to the officials of the Ministry of Agriculture, Kilimo House, who detailed and assigned very high ranking officials to assist me with data collection and validation. Without their help and cooperation, this study would have been an uphill task, given the time and nature of agribusiness in the country. Finally, I join the ABI team, under the guidance of the Task Team Leader, Grahame Dixie, in thanking the Bill and Melinda Gates Foundation for funding the study and extending its support to a second phase of this important work. vi Executive Summary This study is predicated on the fact that agriculture is the backbone of the economies of most countries in sub-Saharan Africa, including Kenya. Any meaningful effort to improve living standards for the majority of people and reduce poverty and hunger across the continent must therefore be anchored in the development and transformation of the agricultural sector. Against this background, the present study identifies success factors and constructs corresponding indicators for agribusiness. The ultimate aim is to stimulate debate and dialogue among policy makers in specific African countries to engender change and reform in areas where investment is needed to leverage agribusiness and economic development. This study relied heavily on an extensive secondary data collection and literature review, supplemented by informal surveys to solicit information from a broad spectrum of stakeholders and actors in Kenya’s agricultural sector. The review and interviews focused on the factors that the agribusiness indicators team determined to be the most critical for agribusiness development across sub-Saharan Africa, based on extensive scoping missions in three pilot countries (Ghana, Ethiopia, and Mozambique). The study in Kenya concentrated on the following success factors: (i) access to critical factors of production (certified and hybrid seed, fertilizer, and mechanization); (ii) the enabling environment for agribusiness (especially access to credit and transport); and (iii) policy issues (examined through the lens of government expenditures on agriculture as well as the trade and regulatory policies that influence the agribusiness environment). It is important to note that the factors and indicators that the research team included in the study are not exhaustive. Rather, they are intended to serve as the basis for a more comprehensive review that would include more variables and countries. Seed. Kenya’s farmers obtain seed of most commodities (except maize and rice) mainly from the informal sector. About 40 percent of farmers’ maize seed comes from the formal public seed companies, and another 20 percent is supplied by private seed companies. The vast majority of hybrid maize seed used in the country—90 percent—comes from the Kenya Seed Company. Although Kenya’s seed laws are under review, among African countries Kenya has one of the most advanced seed laws in place to guide and regulate the use of certified seed. Seed certification is the prerogative of the Kenya Plant Health Inspectorate Service and is governed by the Seeds and Plant Varieties Act (Chapter 326, Laws of Kenya). Because the Seeds and Plant Varieties Act incorporates the International Seed Testing Association’s rules of seed testing and the Organization for Economic Co-Operation and Development’s seed certification schemes, Kenya can trade seed with most other countries in the world that belong to these international seed certification organizations. This privilege has enabled Kenya to import seed in areas where domestic supplies are insufficient. For maize, although adoption estimates vary by year and ecological zone, the use of hybrid and improved seed has increased over the years. Most farmers in Kenya used new hybrid seed; farm survey results showed that only about 25 percent of the land area was planted to retained hybrid seed. Based on a weighted average of all adopters by ecological zone, it is estimated that the adoption of hybrid maize could be as high as about 82 percent, one of the highest in sub-Saharan Africa. It is further estimated that on average certified and improved seed is used on about 70 vii percent of the land under maize and 54 percent of the land under wheat. This feat (particularly hybrid maize adoption) was made possible by an extensive network of agro-dealers, developed through the Citizens Network for Foreign Affairs (CNFA) and the Alliance for a Green Revolution in Africa, which reduced the distances that farmers had to travel to obtain seed. Policies that led to a favorable seed to grain price ratio further encouraged the seed industry’s development. In the past decade, fertilizer application rates in Kenya have gone up significantly. This increase has been attributed to the liberalization of the fertilizer market, which essentially eliminated price controls and import licensing quotas, removed foreign exchange controls, and phased out external fertilizer donations, which had disrupted commercial operations. Fertilizer application rates in Western Kenya’s high-potential agricultural areas are estimated to be more than double those of the last decade and appear to approach those used by Asian and Latin American farmers. Another significant factor in Kenya’s greatly enhanced fertilizer consumption was the development of a private agro-dealer network through a program by CNFA and Agricultural Market Development (AGMARK). The program provided training and helped dealers obtain credit for the private commercial provision of agro-inputs to farmers. The greater accessibility of agro-dealers made it far easier for farmers to obtain a bulky input such as fertilizer. Of particular interest is the fact that fertilizer consumption has grown among Kenya’s smallholders, who account for more than 70 percent of the agricultural output in the country. The average application rate on maize farms increased from 138 kilograms per hectare in 1997 to 177 kilograms per hectare in 2010. The government’s decision in 2009/2010 to reenter the fertilizer market, however, leads most policy analysts to believe that progress in this subsector is in jeopardy. Government importation and distribution of fertilizer invariably undercuts the agro-dealers and could once again result in market distortions and failures, with their associated problems. In terms of mechanization small-scale farmers in Kenya, unlike their counterparts in most other African countries, have as a matter of necessity embraced the use of tractors for land preparation. Use of tractor-drawn implements are particularly very high in the high-potential agricultural areas of the Rift Valley and Western Lowlands, where heavy rains sometimes result in waterlogged and caked soils, which are difficult and labor-intensive to prepare for planting using simple hand implements. The present level of agricultural mechanization in Kenya ranges from 95 percent on large farms to as little as about 4 percent on some small holdings. On the whole, it is estimated that only about 30 percent of the operations on small farms are done using tractors and motorized equipment. An estimated 14,400 units are in use; more than 70 percent are medium-sized tractors of 80–120 horsepower. An additional 30,000 tractors are estimated to have outlived their economic life or to be out of commission for various reasons. The tractor density during the period of the study (2011/2012 cropping season) was estimated at about 3 tractors per 1,000 hectares or 26.9 tractors per 100 square kilometers—much higher than in most other Eastern African countries, including Tanzania and Uganda. Tractor importation is duty free in Kenya, but imports of spare parts are subject to duties and a value added tax of about 16 percent, which has implication for the lifespan of tractors and accounts in part for the fact that at any time about half of the tractors in Kenya are out of commission. The viii market for tractors is largely in the hands of private tractor dealers and is very competitive. Stakeholders confirmed the absence of the public sector in buying and selling tractors in the country. Finance. Access to finance has been seen as the great enabler of any private sector initiative and therefore very important in leveraging agribusiness entrepreneurship. In Kenya, as in most other African countries, the financial sector consists of a large number of formal, semiformal, and informal financial service providers. Formal provision of agricultural credit to farmers is dominated by a specialized agricultural bank—the Agricultural Finance Cooperation (AFC) of Kenya. Today, AFC is the leading government institution mandated to provide credit for the sole purpose of developing agriculture. It has about 48 branches throughout the country, with 41 located in rural areas of Kenya’s high-potential agricultural zones (AFC communication, 2012). Lending by commercial banks to the agricultural sector has not lived up to expectations, despite a legal requirement that 17–20 percent of commercial banks’ loan portfolios must be dedicated to agriculture. Only a slim share of loans from commercial banks has been allocated to agriculture (about 5.3 percent in 2010 and 5.6 percent in 2011)—far below what the government has mandated, indicating serious underfinancing of the agricultural sector. The average interest rate for private sector loans was observed to be about 14 percent, although interviews with key stakeholders in the commercial banking industry showed that loans to agriculture attracted higher interest rates of 20–25 percent. This discriminatory higher interest could be responsible for the relatively higher percentage of nonperforming loans in the sector compared to other sectors of the Kenyan economy. Government efforts to increase the accessibility of formal financial services have started to yield dividends. The expansion of commercial banking networks since 2005, following enactment of a government policy mandating banks to improve their services in rural areas, has been remarkable and significant. The number of rural branches increased from 181 in 2005 to 436 in 2010, which translates into growth of about 140 percent in the five-year period. Though the density of commercial banks in rural areas is only 1.4 branches per 100, 000 people, this ratio is much higher than it is in most countries of sub-Saharan Africa. Lack of collateral remains an issue in agricultural lending particularly for the smallholders. Despite having the infrastructure—a large network of warehouses—Kenya has yet to establish warehouse receipt financing, so this potential mechanism for farmers to use stored commodities as collateral for loans is yet to be harnessed. At the time of the interviews (April/May 2012), Kenya still lacked the legal and regulatory framework to establish a commodity exchange that would govern grain trade and facilitate (among other things) warehouse receipt financing for smallholders, who remain locked out of financial services. Transport. Particularly in sub-Saharan Africa, where transport costs constitute a very significant component of the total cost of doing business in the agricultural sector, improvement in the performance of logistics is an important policy objective. In Kenya, 96 percent of the passenger and goods traffic is through the road network, and only about 4 percent is by rail, air, sea, or lake. Road transport is extremely important with regard to bulky, heavy agricultural produce, which sometimes has to be transported long distances. About 70 percent of Kenya’s classified road network is estimated to be in good/fair condition and maintainable; the remaining 30 percent requires rehabilitation or reconstruction. Yet very few rural routes (about 5 percent) are judged to be in good ix condition. The state of rural roads may be partly responsible for the high cost of moving goods, particularly from the farm gate to the first assembling point for marketing. High taxes and tariffs continue to deter transporters from importing new trucks. During the study period, it was estimated that the numerous taxes on a new imported truck could add up to more than 50 percent of the CIF price. Despite the fact that the government has built more roads and improved the Rural Access Index, Kenya’s high transport costs account for about 35 percent of the total logistics cost along the Northern Corridor in Kenya. On the overall Logistic Performance Index, Kenya scores below the average for all of sub-Saharan Africa (2.16 for Kenya, compared to 2.29 for sub-Saharan Africa) and well below Africa’s top performer (South Africa, at 3.67). Stakeholders agreed that reducing weighbridges, adopting weighing in motion, and reducing or eliminating the numerous police roadblocks would go a long way toward enhancing the efficiency of inland transport systems and reducing transport costs in Kenya. Conclusions and policy implications. The government has made giant strides in such areas as fertilizer and seed, yet the overall perception among the major stakeholders is that much more needs to be done, and at an accelerated pace. The general consensus is that the government’s budget allocation to the agricultural sector is still low at 4.3 percent on average and needs to be increased to at least 10 percent as stipulated in the framework for the Comprehensive Africa Agriculture Development Program. There are still long delays in ratifying and approving the reform bills and legislation that should be in place for effective private sector development in agriculture. Although advocacy groups have become more influential and vocal in the last decade, they need to be still more cohesive and dynamic if they are to play very active roles in influencing policy changes and reforms that could improve the agribusiness environment in Kenya. Table A: Summary of matrix tables of agribusiness Indicators and findings for Kenya, 2011/12 Agricultural productivity measures Indicator findings Access to critical factors of production Certified seed Existence and implementation of Rating = 3.5. Kenya belongs to ISTA and use regional and national seed laws and OECD certification schemes regulations Percentage of maize area planted to 67.2% certified seed (average 2000–10) Percentage of wheat area planted to 54.2% certified seed Percentage of seed demand met by the Beans (1.7%), cowpeas (4.8%), maize (71.1%), formal sector rice (57.0%), sorghum (71.3%), wheat (63.1%) Sales of imported maize seed as % of Maize: 13.8% (2005–10); 15% in 2010 alone total sales of certified seed Time required to register, test, and 2–3 years obtain approval to clear and use imported seed % of foundation seed provided by 100% (All breeder and foundation seed is government organizations supplied by the government owned KARI x Number of private seed companies 90 (2012). The number increased from 67 in operating in the country 2008. % of certified seed multiplied by 20% private firms and farms vs. government Seed to grain price ratio (profitability 5.1 and risk prospects in certified seed business) Ease of private sector participation in Rating = 2.5 the seed market (Scale: 0-5) Fertilizer use Average total fertilizer consumption 444,463.5 t/yr (2006–10) Fertilizer application rates/intensity of 46 kg/ha of nutrient or 100 kg/ha of chemical use for all crops (kg/ha) fertilizer Fertilizer application rates/intensity of 81 kg of nutrient or 177 kg/ha use on maize fields only Percentage of fertilizer use by crop type: Cereals 74.7% Tea 12.9% Horticulture 6.7% Coffee 5.5% Tobacco 0.1% % of farmers using fertilizer at 35% (2010) recommended rates CIF price Mombasa (current prices) of DAP: US$ 676.70 metric ton of fertilizer—diammonium Urea: US$ 560.60 phosphate (DAP) and urea Average cost per ton to main DAP: US$ 886.1 agricultural zones including Urea: US$ 757.1 transportation and handling CIF price as % of price paid by DAP: 76.4% farmers Urea: 74.0% Value–cost ratio (value of one unit of 2.14 (all main crops, 1997–2010) output to cost of one unit of fertilizer to produce that output) Nutrient to output price ratio (Pn/Po) Maize: 7.96 Wheat: 8.77 Fertilizer subsidy (% of retail cost) 40% (provided to selected poor farmers with a farm size of 1 ha or less in about 84 districts) Tariffs and taxes on fertilizer 0% (zero rated), but there is an Import Declaration Fee of 2.25% of CIF price Ease of private sector participation in Rating = 4. Private sector currently imports the fertilizer market (Scale: 0–5) about 80% of fertilizers. About 12 commercial fertilizer importers, an estimated 500 wholesalers, and about 8,000 retailers (including 5,284 registered agro-dealers) operate in the xi country. Agro-dealer density (agro- 5.8 dealers/10,000 farmers) Mechanization Total number of tractors in the 14,400 country Total number of tractors per 100 km2 26.9 of arable land Number of tractors per 1,000 ha 3 Estimated total HP for tractors in the 1,460,160 HP country Estimated average HP per 100 km2 2,755 HP Average HP per ha of arable land 0.28 HP Cost of tractor rental for plowing 1 ha Parastatals (ADC) Ksh 2,500 (US$ 31.25) Private sector Ksh 4,000 (US$ 50.00) Cost of disc harrowing 1 ha Parastatals (ADC) Ksh 1,200 (US$ 15.00) Private sector Ksh 2,000 (US$ 31.25) Number of tractors imported by the 100%. Government not involved in tractor private sector as a % of all tractors imports. imported into the country Average cost of buying a medium- Ksh 3.9 m (US$ 48,700) range HP tractor (90–120 HP) Useful life of tractors Average of 11 years, with an estimated average number of engine hours of about 15,000– 20,000 owing to the dearth of tractors Tariff on tractors 0% (zero rated) Tariffs and taxes on tractor spare parts 16% of CIF (duties and VAT) Ease of private sector participation in Rating = 5.0. Government does not import the agricultural machinery market tractors. (Scale: 0–5) Support service measures % agricultural Percentage of commercial bank 5.7%--despite the government mandate that finance lending to the agricultural sector in commercial banks devote 17–20% of the loan overall portfolio (2006–11) portfolio to agriculture. The share of agriculture in KCB’s portfolio was 6%. Commercial bank average nominal 3.68% interest rates on deposits Commercial bank average lending 14.19%. Interest rate spread in 2011/12 was rates for loans to agriculture about 10.51%. Although the average lending rate for the private sector was about 14%, interviewees in the sector said that loans to agriculture attracted interest rates of 20–25%. Percentage of nonperforming loans 8.5% for all banks; 3% for KCB. (within agriculture) from commercial xii banks Bank branches per 100,000 rural adult 1.4 branches per 100,000 people population Access to banking by rural dwellers 17.8% Access to banking by urban dwellers 40.3% Access to banking by women 17.8% Financial inclusion: % adults accessing 41% credit Access to finance by farmer-based Yes. Most FBOs in Kenya are cooperatives and organizations (FBOs) farmers’ organization. Existence of a warehouse receipt No. One is in the pipeline, however, with all financing system (Y/N; Scale: 0–5) the regulations in place and waiting to be implemented. Existence of a law on leasing (and Yes. Several laws and amendments exist to extent of use of leasing) regulate leasing arrangements and in the use of movable property as collateral. Existence of a credit reference bureau Yes. Sharing of credit information through the (CRB) CRB was launched in July 2010. In 2011 the Central Bank of Kenya (CBK) licensed Metropol Ltd. to operate, making it the second bureau after CRB Africa. Presence of a collateral registry Yes. Kenya has a collateral registry in operation that is organized geographically and by user type. Transport Freight from primary to secondary Ksh 20.80 (US$ 0.26) per market Freight from primary to major cities Ksh 13.60 (US$0.17) per kmt Inland freight from Mombasa to Ksh 12.57 (US$ 0.15) per kmt major cities Freight in the international Northern Ksh 9.60 (US$ 0.12) per kmt Corridor (Mombasa to major cities) Overall freight averagea Ksh 14.10 (US$ 0.18) per kmt Time required to register a truck for 29 days hauling agricultural products (days) Transit fee 0.49% of total transport cost across the Kenyan border; Ksh 5,000–9,000 per truck, depending on border officers Ease of entry into trucking of Rating = 2.5 foodstuffs (Scale: 0–5) Opinion of traders and truckers on the Rating = 4.5 competitiveness of trucking services (Scale: 0–5) Quality of trade- and transport-related LPI = 2.16 out of 5, with an overall LPI of 2.43 infrastructure (e.g., ports, railroads, roads, information technology)— Logistics Performance Index (LPI) xiii Rural Access Index (RAI): % rural RAI = 44% (1997); 60% (2012) population within two kilometers of a road Good:5% Percent of rural road in good, fair, and poor condition Fair:22% Poor:72% Policy and institutional measures and the enabling and regulatory environment Private sector Private sector perception of 3.0. The government is more involved in perception of agribusiness enabling environment formulating polices and regulating the business policy (Scale: 0–5) environment but sometimes intervenes, albeit environment sporadically, in the importation and distribution and advocacy of fertilizers and other inputs. Other than this, role the government has embarked on the privatization and divesture of government corporations and firms that are in direct competition with the private sector. Policy consistency (scale: 0–5) 3.5. The government is embarking on (perceptions of foreign and domestic numerous policy changes to leverage investors that frequent, unexpected, or agribusiness and attract foreign and domestic arbitrary changes in policy, regulations, investors in the agribusiness industry. Although and rules will affect the operation and most of these changes could be very helpful, profitability of their businesses) they still make investors “nervous” and uncertain of the overall effect on their businesses. Private sector advocacy group for Rating = 3.5. Kenya has one of the most agribusiness: Existence and organized and advanced apex agricultural effectiveness organizations, which brings together all other organizations and has a very strong advocacy group in Africa. Government Comprehensive Africa Agriculture Average government expenditure allocated to commitment Development Program (CAADP) the agricultural sector from 2003 when to agriculture framework stipulates that at least 10% CAADP was inaugurated to 2011 was a mere of annual government 4.3%, well below the CAADP target. budget/expenditure should be allocated to the agricultural sector Trade and The main trade policies currently The national average for the producers’ share marketing influence producers’ share of FOB of the FOB Mombasa auction price was 86, policy prices of the main export commodity indicating that current government policies as indicators (tea), so the producers’ share of the far as tea is concerned are very favorable for tea FOB price was used as a proxy to producers. quantify the effect of government policies Percent of total staple crop (wheat and About 30 percent of the maize crop passes maize) production passing through through formal industrial processing to formal marketing channels produce maize meal for ugali (the staple porridge consumed by the majority of Kenyans). a Overall average is obtained by simple average. xiv Agribusiness Indicators: Kenya 1. Introduction 1.1 Rationale and Contextual Framework for Agribusiness Indicators in Sub-Saharan Africa The importance of agriculture in the economies of sub-Saharan African countries cannot be overemphasized. With agriculture accounting for about 65 percent of the region’s employment and 75 percent of its domestic trade, significant progress in reducing hunger and poverty across the region depends on the development and transformation of the agricultural sector. Transforming agriculture from largely a subsistence enterprise to a profitable commercial venture is the prerequisite and driving force for accelerated development and sustainable economic growth in sub-Saharan Africa. Extensive empirical evidence indicates a direct correlation between agribusiness development and economic growth and sustainability (OECD 2008; FAO 2010b; UNIDO 2011) In other words, over the long run, economic growth and sustainability can be guaranteed only by developing the dominant sector of most African economies— agriculture—through increasing investments. To attract both domestic and foreign investments, particularly in developing countries, the World Bank advocates the development of public institutions and the promotion of a positive regulatory and investment environment. In fact, the inclusion of private sector actors along the agriculture and agribusiness continuum tends to improve the whole range of activities in agricultural value chains (production, processing, and marketing) by making the most of comparative advantage and by promoting competitiveness—and at the same time improving productivity, value addition, marketing, and infrastructure. The resulting backward and forward linkages created in downstream and upstream activities are necessary to create employment and generate income. In the view of the World Bank and many other development agencies, private sector development is integral to attracting foreign direct investment (FDI). FDI can increase the financial capital base for investment spending, which is responsible for much of the economic output generated by a country. The inflow of FDI comes with additional benefits in the form of technology and knowledge transfers across international boundaries (Javorcik 2004, 2008). Policy analysts believe that knowledge brought by foreign affiliates spills over to domestic firms, increases their competitiveness, and accelerates economic growth overall by enabling them to extend their production and efficiency frontiers. The rationale behind the development of agribusiness indicators (ABIs) is to construct indicators for specific factors to support successful, effective private sector involvement in agriculture. The indicators can be used to benchmark and monitor performance in the agricultural sector over time and across countries. The resulting information can provoke knowledge flows and meaningful dialogue among policy makers, government officials, donors, private sector actors, as well as other stakeholders in the agricultural sector. Ideally, such dialogue would encourage policy and institutional reforms aimed at improving the business environment for agriculture, gradually shifting 1 smallholder production from subsistence to a market orientation, and promoting economies of scale among semi- subsistence and large-scale producers. By developing information that could foster private participation in African agribusiness, the ABI effort in its entirety is consistent with the goals of the Comprehensive Africa Agricultural Development Program (CAADP). An initiative of the New Partnership for Africa’s Development, CAADP seeks to promote investment in agriculture and agro-based industries throughout Africa (UNIDO et al. 2010). 1.2 Overview of the Kenyan Agricultural Sector The agricultural sector in Kenya, like in most other countries in sub-Saharan Africa, is a mainstay of the economy and obviously central to its overall growth and development. The sector currently contributes about 26 percent of gross domestic product (GDP) and accounts for 65 percent of all exports. At the same time, agriculture provides more than 18 percent of formal employment and about 70 percent of informal employment in the rural areas where the majority of the population resides. Kenya’s agricultural sector comprises six subsectors: industrial crops, food crops, horticulture, livestock, fisheries, and forestry. The industrial sectors accounts for about 17 percent of agricultural GDP (AgGDP) and about 55 percent of the value of agricultural exports. Horticulture has grown remarkably to account for the largest share of AgGDP (about 33 percent) and to contribute an impressive 38 percent of export earnings from agriculture. The food crops subsector contributes 32 percent of AgGDP and only about 0.5 percent of exports, whereas the livestock subsector is responsible for 18 percent of AgGDP and a mere 7 percent of agricultural exports ( Figure 1). Despite the marginal contribution of food crops to exports, this subsector remains the most vital in terms of meeting national food requirements and uses the most inputs (fertilizer and seed) compared to other subsectors. Figure 1: Share (%) of agricultural subsectors in agricultural gross domestic product Source: GoK 2010; MoA 2010. 2 In a country where a large share of the population relies on agriculture as the main source of employment and sustainable livelihoods, the strong correlation between growth in the agricultural sector and growth and development in the overall national economy clearly indicates that agriculture is the engine of Kenya’s economic growth. Development of the sector is a prerequisite for fighting poverty, reducing food insecurity, and improving the general economic wellbeing of the entire population ( Figure 2). Figure 2: Trends in agricultural and economic growth, Kenya (2005–10) Source: GoK 2010. Although the agricultural sector has shown remarkable growth, its inconsistent progress has been a major source of concern for the Government of Kenya. In the first two decades after independence, the agricultural sector and thus the national economy recorded the most impressive growth in sub-Saharan Africa, achieving average growth rates of 6 percent for agriculture and 7 percent for the national economy (GoK 2010). It has been argued that this growth occurred in response to the government’s call to the people to return to the farms (rudini mashambani). Cultivated area expanded greatly, with farmers making use of the best technology available at the time. Unfortunately, agricultural growth could not be sustained. It declined in the following decade, and between 1980 and 1990 agriculture grew by only 3.5 percent per year on average in Kenya, compared with agriculture in Uganda (3.7 percent), China (4.1 percent), and Vietnam (4.8 percent). Official reviews of the sector’s perfo rmance during this period largely held low public investment to be responsible for poor performance; at the time, agriculture accounted for just 2 percent of the national budget. 3 Growth in the agricultural sector resumed in 2000 and in 2007 peaked at 6.9 percent, in response to a larger budget allocation, policy reforms, and the revitalization of agricultural institutions to be more responsive to farmers’ needs. These gains slipped away following the violence surrounding the 2007 general elections. In 2008 the sector recorded its worst performance in recent memory as the growth rate plummeted to –4.1 percent. Agriculture in Kenya is dominated by small-scale farming, concentrated mainly in high-potential areas. Production is carried out on farms averaging 0.2–3.0 ha, mostly on a commercial basis. This small-scale production accounts for 75 percent of agricultural output and 70 percent of marketed agricultural produce. Small-scale farmers produce over 70 percent of maize, 65 percent of coffee, 50 percent of tea, 80 percent of milk, 85 percent of fish, and 70 percent of beef and related products—all despite relatively low adoption of improved inputs such as hybrid seed, concentrate feeds, fertilizer, pesticides, and machinery (GoK 2010). Clearly these farmers have huge potential to increase productivity by adopting modern farming practices. Progress in the sector ultimately depends to a large extent on transforming the production pattern of these smallholders, who account for most of Kenya’s agricultural output. Fortunately, Kenya has returned to the path of agricultural and therefore economic growth. In 2010, the agricultural sector grew by 6.3 percent, while growth in the national economy as measured by real GDP also grew at a phenomenal 5.6 percent. Such high growth rates were achieved within a very short time because institutions and plans in place before the 2007 civil disorder continued to move forward, enabling the economy to remain resilient despite the distortions in production and marketing resulting from the turmoil of 2007. 1.3 Agricultural Production Trends in Kenya Kenya’s return to agricultural growth is partially attributed to the government’s Strategy for Revitalizing Agriculture (SRA), launched in March 2004. The government’s overall objective in a dopting the strategy was to transform agriculture into a “profitable, commercially-oriented and internationally and regionally competitive economic sector that provides high-quality, gainful employment to all Kenyans” (GoK 2010). In line with SRA, the gove rnment introduced new measures and policies. For example, it reinvigorated the Ministry of Agriculture to strengthen and improve extension and advisory services. It also formulated and/or reformed agricultural and food security policies and programs to make them more relevant and better aligned to address the twin problems of hunger and poverty within the country. To fast track reforms in the agricultural sector, the SRA identified six specific interventions: 1. Review and harmonize legal, regulatory, and institutional frameworks. 2. Restructure and privatize core functions of parastatals and sector ministries. 3. Improve the delivery of research, extension, and advisory services. 4. Improve access to quality inputs and financial services. 5. Improve access to both domestic and external/international markets. 6. Formulate food security policies and programs. In line with its objectives, SRA has been able to deliver on several fronts. First, the government established the Agricultural Sector Coordinating Unit (ASCU) to streamline activities of the various departments and ministries related in one way or another to agriculture in the country. The unit is now well established and plays a key role in coordinating issues in agriculture that cut across ministries. It also serves as a one-stop shop for information on all matters dealing with opportunities for investment and trade in agriculture and related sectors. 4 The second accomplishment under the SRA—and a major success—was to reorganize, restore, and revive the public agricultural institutions that provide both direct and ancillary services to the agricultural sector. Institutions on the verge of collapse have since been revived, including the Kenya Seed Company (KSC), the Agricultural Finance Corporation (AFC), the Agricultural Development Corporation (ADC), and the Kenya Co-Operative Creameries. Moribund parastatals and government corporations charged with providing vital services in agricultural research, extension, and tractor hire were also revived; some were privatized and are even earning profits. Another major milestone achieved through the SRA was significant improvements in crop productivity, particularly maize. Average maize yields rose from 1.5 tons per hectare to 3 tons per hectare (GoK 2010). This increase was attributed to better extension services and technology transfer, in conjunction with improvements in the density of agro-dealer outlets, which considerably reduced the distance and costs involved in farmers’ procurement of inputs. Yields obtained by medium- and large-scale farmers increased at an even higher rate than those of smallholders. During this transformative period for agriculture, the Government of Kenya and other stakeholders learned crucial lessons about the role of the private sector. A review of the SRA noted that while accelerated growth in agriculture requires substantial support and increased investment from the public sector, “much of the work—production, processing, marketing, value addition, and financing—has been done by the private sector.” In other words, the government has embraced the notion, long advocated by the World Bank Group, that increased public-private partnership is critical to leverage agribusiness in countries where agriculture is the mainstay of the economy. This lesson is reflected in the government’s Kilimo Biashara (agribusiness) campaign to drive home its philosophy of transforming the agricultural sector into a commercialized entity capable of generating employment and reducing poverty. In summary, despite some drawbacks, agriculture has shown resilience and has arguably made giant strides that improve Kenya’s prospects for attaining the kind of agricultural transformation that occurred in some Asian and Latin American countries. Several reforms (policy changes as well as institutional and structural transformation) have taken place in the agricultural sector. A valuable exercise would be to quantify, using some well-defined indicators, the effects of recent policy and institutional changes on the development of agribusiness in Kenya. The indicators would also be helpful to examine Kenya’s performance over time, compare it with that of other countries, and monitor the effects of selected policy changes and reforms on agribusiness. In this way, the government, policy makers, and others concerned with agriculture in Kenya and elsewhere in sub-Saharan Africa will gain important input into the current efforts to develop the sector. 2. ABI Methodology The methodology used to develop the indicators draws on the Doing Business approach adopted by the World Bank Group and International Finance Corporation, which uses 10 broad indicators (and up to 41 sub-indicators) to capture the general business conditions and investment climate for urban-based enterprises in 185 countries The overall objectives of Doing Business are to motivate reforms through country benchmarking, inform the design of reforms, enrich international initiatives to improve the effectiveness of development, and ultimately inform theory (World Bank 2008). In contrast to Doing Business, the ABI effort concentrates on the broad and diverse spectrum of actors along the value chains for key agricultural commodities. By holistically studying a fairly representative 5 sample of firms, farms, and actors in the agribusiness industry, the ABI initiative builds a constituency of key informants and triangulates data collection to ensure a high degree of data quality and consistency, with the goal of enhancing the reliability of the indicators constructed. 2.1 Data for the Study The study relied heavily on secondary data and discussions with key informants; as noted, informants represented a very broad spectrum of actors involved in the production, processing, and marketing of key agricultural commodities in the country. In addition, the team conducted a detailed review of scientific publications as well as policy research papers to understand the environment for agriculture and agribusiness. The idea was to obtain relevant information highlighting factors that limit as well as promote private sector participation in Kenya’s agribusiness industry. Secondary data were collected from various sources, including the Food and Agriculture Organization (FAO), Ministry of Agriculture (MoA), Kenya Agricultural Research Institute (KARI), KSC, Tegemeo Institute of Agricultural Policy and Development, Kenya Agricultural Development Authority, AFC, International Fertilizer Development Center, ASCU, Kenya Plant Health Inspectorate Service (KEPHIS), Kenya Farmers Association, Kenya Commercial Bank (KCB), Alliance for Green Revolution in Africa (AGRA), Kenya Shippers Council, Citizens Network for Foreign Affairs (CNFA), and Kenya National Federation of Agricultural Producers (KNFAP). YARA Fertilizer Company and a host of other actors and stakeholders, including importers of tractors and farm equipment, also provided information. Still other sources of information included international and national researchers and universities, development partners and organizations in Kenya, local institutions and nongovernmental organizations (NGOs), and policy makers in the sector. About 100 respondents were interviewed in Kenya during the course of three missions that lasted approximately 8 weeks and benefited from the contributions of a local consultant working for 40 days. In summary, the methodology involved five steps: 1. A scoping mission to identify important key stakeholders and isolate the important success factors that promote or hinder private sector participation and agribusiness development in Kenya. 2. An extensive and elaborate literature review to understand the agricultural situation of Kenya and collect secondary data to construct indicators for benchmarking and cross-country comparisons. 3. Face-to-face interviews with key informants to complement and validate information obtained from the literature and provide a basis for ensuring the quality and consistency of the data through triangulation and reconciliation. 4. An internal and external peer review mechanism, involving individuals knowledgeable about Kenyan agriculture, to validate and enrich the quality and acceptability of the study’s findings. 5. Strategic dissemination of the findings to selected key stakeholders in Kenya, including government officials, to make the government, private sector, and other actors aware of the findings, collect feedback, and lay the groundwork for meaningful policy dialogue related to developing the agribusiness sector. Note that the success factors identified and data collected for this pilot study are not exhaustive or all encompassing. Rather, what this pilot study intends to do is to focus on the most “critical factors.” Over time the aim is to build upon the number of success factors to be analyzed and also expand on the number of African 6 countries to be studied for meaningful benchmarking and cross-country comparisons of representative countries in sub-Saharan Africa. 2.2 Success Factors and Indicators for Agribusiness Based on consultations with other departments and individuals in the World Bank and extensive brainstorming by the ABI team, several categories of success factors were identified as the most relevant for promoting and leveraging private sector development and engagement in Africa’s agriculture:  Access to critical factors of production, including certified seed, inorganic fertilizer, and mechanization.  Support service measures, including finance and transportation.  Policy and institutional measures and the enabling and regulatory environment, including fiscal, monetary, and trade policies; private sector perceptions of the enabling environment, particularly with regard to whether the government was crowding out the private sector; the role and Influence of civil society and advocacy groups; and the existence of roundtables on issues affecting stakeholders in the agribusiness sector. The annexes summarize the success factors and indicators developed. 3. Findings on the Success Factors and Indicators Determining the presence or absence of the success factors and constructing reliable indicators that can be used for benchmarking and for cross-country comparisons requires an understanding of production and marketing systems as well as the agricultural policies and enabling environment that promotes or hinders agribusiness in a given country. To provide that contextual information, this section looks specifically at farmers’ access to critical factors of production, support services for agriculture and agribusiness, and the impact of government policies and the general enabling and regulatory environment for agribusiness. 3.1 Access to Critical Factors of Production Agricultural production in Kenya is often classified by the scale of production and use of modern farm inputs. The government’s new Agricultural Sector Development Strategy 2010–2020 used the following categorization:  Smallholder agriculture. As mentioned, agricultural production in Kenya largely involves small-scale farmers generally operating on a commercial basis in the country’s high-potential zones. This group accounts for about 75 percent of agricultural output and 70 percent of the marketed agricultural produce (GoK 2010). Farms in this group average 0.2–3.0 hectares and produce about 70 percent of Kenya’s maize, 65 percent of its coffee, 50 percent of its tea, 80 percent of its milk, and about 70 percent of its beef and related products. The adoption of improved and modern inputs such as hybrid seed, fertilizer, pesticide, and agricultural machinery is relatively low, indicating huge potential to increase productivity.  Medium-scale farmers. On holdings of 3–49 hectares, medium-scale farmers generally engage in commercial agriculture and tend to adopt new technology at a high rate. These farmers usually obtain credit to invest in inputs. As a result crop yields are usually high (for example, maize yields can reach about 4 tons per hectare).  Large-scale producers. This group of producers normally holds more than 50 hectares for crop production and about 30,000 hectares for livestock production. Large-scale farms account for about 30 7 percent of the agricultural produce marketed in Kenya. Farming is commercial, characterized by significant investments in inputs and high yields (maize yields on some farms reach 6 tons per hectare) (GoK 2010). Numerous studies have clearly shown that farmers’ yields of major crops are well below what is technically feasible. Gaps between actual and potential yields of as much as 5 tons per hectare have been recorded for maize. Although the considerable differences in resources among farmers and the great diversity of agro-ecologies in Kenya can explain some of the disparity between actual and potential yields, it is generally acknowledged that greater use of modern inputs and improved agronomic practices could considerably improve farm productivity and incomes. The use of modern inputs would help to regularize yields from one year to the next and reduce some of the large differences in yields seen in any given year across Kenya’s agro-ecological zones. Figure 3 compares average maize yields (kg/ha) attained by farmers with potential yields in Kenya’s major maize-producing zones. Figure 4 shows the wide differences in maize yields attained in different agro-ecological zones, a factor that contributes to Kenya’s low overall average yields of maize. Figure 3: Actual versus potential maize yields (kg/ha) (2000–10) Source: MoA; ICRISAT 2011. 8 Figure 4: Average maize yield (t/ha) in different provinces (2004-2010) Source: IFDC 2012. 9 3.1.1 Access to Certified Seed Table 1: Summary of indicators for access to certified seed Category Indicator Base year/period and value Use of certified seed Percentage of maize area planted to certified seed: 2000 65.4% 2004 62.9% 2007 65.5% 2010 74.9% Average (2000–10) 67.2% Percentage of wheat area planted to 54.0% certified seed Percentage of seed demand met by formal sector for: Beans 1.7% Cowpeas 4.8% Maize 71.1% Rice 57.0% Sorghum 71.3% Wheat 63.1% Legislative and regulatory Kenya belongs to ISTA and OECD 3.5 framework certification schemes, so the international seed laws in place allow the country to trade in certified seed. Some of Kenya’s seed laws are outdated and currently under review, awaiting debate and ratification by Parliament. Seed importation Sales of imported hybrid maize seeds as a 13.8 (2005–10); in 2010 the amount % of total sales of certified hybrid maize was 15%. seeds in 2010. Time required to register, test, and obtain 2-3 years approval to clear and use imported seed Tariff and duties on seed import: Zero, but importers must pay an Import Declaration Fee (IDF) of 2.25% of the cost, insurance, and freight (CIF) value and handling and documentation charges of 0.65% of the CIF value. Private sector participation Percentage of foundation/breeder seed Zero. All the breeder seed is in seed production and provided and supplied by seed companies produced by the Kenya distribution Agricultural Research Institute (KARI). Percentage of certified seed multiplied 20% and supplied by private firms/farms/market share of private firms 10 Number of private firms involved in The number of seed companies in producing, processing, and distributing country increased from about 67 in certified seed in the country 2008 to 90 in 2012. Distance to seed dealers: Average distance to the nearest hybrid 3.9 km maize seed dealer in the country Farthest distance to the nearest hybrid 18.7 km maize seed dealer Average nearest distance to hybrid maize 1.5 km seed dealer Seed to grain price ratio 5:1. Empirical evidence has shown that for a hybrid maize seed business to be viable and profitable, the price ratio of certified/hybrid seed to grain should be in the region of 5:1; it should be 2:1 for basic grains such as maize, wheat, and barley, especially during the emergence and growth phases of the seed industry. Stakeholders’ perception of ease of 2.5. KSC, which controls more private sector participation in the seed than 80% of the formal seed market (Scale: 0–5) market, enjoys a big “monopoly” in the market for certified seed, particularly hybrid maize seed. Because of its market power, KSC can set a uniform price for most certified seed, and any variation in seed prices, particularly for maize, would result from such factors as transportation and handling costs. Note also that KSC has market outlets in Tanzania, Malawi, and Uganda. Research has shown that certified seed, as a factor for increasing agricultural productivity, accounts for about 50 percent of the increase in crop yields, whereas improved agronomic practices, including irrigation and fertilizer, account for the other 50 percent. The adoption of improved varieties therefore is a prerequisite for increasing agricultural productivity and profitability, particularly among smallholders, whose productivity is well below potential. I: Area of major crops planted to certified seed Most commercial seed companies in Kenya produce mainly hybrid seed. They have little or no interest in producing seed or other planting materials for open pollinated or vegetatively propagated crops (such as cassava and sweet potatoes) because of their low profitability. 11 Farmers in Kenya, like their counterparts in most African countries, have two sources of seed. Informal seed sources include neighboring farmers who sell retained seed and local and/or informal markets. Seed from these sources usually consists of local or unimproved varieties or varieties whose quality has not been proven through certification. Formal seed sources include licensed agents and stockists, who are usually trained and certified by KEPHIS (Ayieko and Tschirley 2006; Smale and Olwande 2011). With the exception of maize and rice, seed for most commodities is supplied mainly by the informal sector. About 40 percent of maize seed comes from formal public seed companies, while another 20 percent comes from private seed companies. KSC accounts for about 90 percent of the hybrid maize seed sold in the country. About 80 percent of certified rice seed comes from the public sector. Seed of most other commodities comes from the informal seed system, especially farm-saved seed (Ayieko and Tschirley 2006). Figure 5 shows sources of seed for farmers in Kenya; Figure 6 shows the seed supply and demand estimates for selected crops. Figure 5: Sources of seed for farmers in Kenya (2010) Source: Smale and Olwande 2011. 12 Figure 6: Quantities of certified seed of major crops demanded and supplied in Kenya and the supply gap*2010 Source: Authors’ calculations, based on Aiyeko and Tschirley 2006; MoA Economic Review 2011; data from KSC and Pioneer Seed Company, Nairobi. *The supply gap does not show well because some values are quite small and do not compare well with others. Although estimates vary by year and by agro-ecological zone, the use of hybrid and improved maize seed has increased over the years. Most farmers in Kenya use new hybrid seed, and farm survey results for 2010 showed that only about 25 percent of the maize area was planted to retained hybrid seed. Based on a weighted average of all adopters by agro-ecological zone, it is estimated that the adoption of hybrid maize could be as high as about 82 percent, one of the highest in sub-Saharan Africa (Smale and Olwande 2011) ( Figure 7). On average, certified and improved seed are used on about 70 percent of the maize area and 54 percent of the wheat area. 13 Figure 7: Percent of maize area planted by seed type (2000–2010) Source: Smale and Olwande 2010. II: Legal and regulatory framework for seed production, multiplication, and certification Six major Acts of Parliament govern the seed sector. These laws are administered principally by KEPHIS, the Pest Control Products Board, and the National Bio-safety Authority. They include the Seeds and Plant Varieties Act (Chapter 326, Laws of Kenya); the Plant Protection Act (Chapter 324, Laws of Kenya); the Suppression of Noxious Weeds Act (Chapter 325, Laws of Kenya); the Agriculture Produce (Export) Act (Chapter 319, Laws of Kenya); Pest Control Products Act (Chapter 346, Laws of Kenya); and the National Bio-safety Act No. 2 (2009). Interviews with stakeholders revealed some serious limitations in those laws and the need for reforms. For example, the seed laws assume that KSC is the only company licensed to produce and sell certified seed in the country, whereas in fact about 90 licensed seed growers and companies operate in the country. There is no legal guidance on how to prosecute individuals or companies that violate the existing seed laws and acts. As of this writing, Parliament has yet to ratify the revised seed acts and policies. Seed certification in Kenya—the prerogative of KEPHIS alone—is governed by the Seeds and Plant Varieties Act (Chapter 326, Laws of Kenya), which is guided by the ISTA rules for seed testing and OECD seed certification schemes. The OECD certification process includes registration, three field seed crop inspections during the active growth stages: when the crop is knee high, at flowering (the critical plant growth stage), and at maturity. The ISTA rules are applied during seed processing, seed laboratory testing, labeling and sealing, post control, and post certification survey. All seed imported into the country must fulfill ISTA requirements in addition to satisfying the relevant phytosanitary measures, including laboratory quality tests upon arrival. 14 On average, it takes about two to three cropping seasons (2–3 years) for new varieties to be certified, after which they can be multiplied and released for propagation and use by farmers. A variety approval process fee includes the National Performance Trials (US$ 500) and Distinctness, Uniformity, and Stability tests (US$ 600 for two seasons). Interviews with key stakeholders suggest that these fees paid by breeders and seed companies for certification are very high and that some small seed companies are unable to pay them. In some cases, AGRA has come to the aid of small seed companies by helping to fund the certification process. At the time of the interviews for this study, the seed law and policies were being reformulated and revised to reflect recent developments in the seed industry, and the draft was in the House of Parliament for discussion and debate prior to ratification. Although this process has been somewhat extended, Kenya has one of the most advanced seed laws and regulations in sub-Saharan Africa, belongs to international seed certification organizations, maintains a sophisticated seed certification process, and thus scores a 3.5 in terms of its seed laws and regulations. III: Private sector participation in producing and marketing improved seed of major grains Kenya’s annual seed requirement varies from 24,000 to 50,000 tons, with actual demand from both formal and informal sources in excess of 100,000 tons. Annual seed sales average 30,000–37,000 tons. KSC is the dominant player in the production and marketing of certified seed in Kenya. Most of the certified seed originates from the Kenya Seed Unit (KSU) of KARI. The unit produces and maintains all pre-released and released varieties, inbred lines, and populations as well as producing breeder, pre-basic, and basic seed. The formal seed sector purchases breeder seed and the informal sector purchases basic seed for further multiplication. Seed companies use breeder or basic seed purchased from KSU to produce certified seed/stocks/seedlings. KSU also multiplies quality seed and planting material for sale directly to farmers through selected seed growers and nursery operators (KARI 2012; KEPHIS personal communication 2012). Kenya's adherence to OECD and ISTA standards enables trade with other participating countries, but the majority of Kenya's trading partners in Africa belong neither to OECD nor ISTA. Only six countries in Africa (Egypt, Kenya, Zambia, Malawi, Zimbabwe, and South Africa) are ISTA members with the requisite strong capacity to conduct the laboratory tests needed to meet ISTA standards. This situation limits cross-border seed trade between Kenya and the rest of Africa. Within the East African Community, Kenya and Uganda subscribe to the OECD seed certification scheme, but only Kenya adheres to ISTA standards. As a result, Uganda is the largest export market for Kenyan seeds, though the market remains small (Diaby and Kamau 2011). The Forum for African Seed Testing (with a secretariat in Nairobi) has been formed to help African states develop facilities and training to gain accreditation from ISTA and OECD. All in all, KSC is estimated to have a very big monopoly in the market for certified seed. Although there are about 90 registered seed companies in the country, KSC has a market share of about 77 percent, enabling KSC to set and dictate the terms of trade in this subsector. The Seed Trade Association of Kenya covers about 90 percent of Kenya’s formal seed business but provides only 20 percent of planting materials. The association’s members are registered producers, processors, distributors, or sellers. 15 IV: Seed imports in Kenya Due to severe shortage of certified seed, imports have been rising. Recent figures show that seed imports into the country peaked in the 2009 cropping season to about 20 percent before declining to 15 percent in 2010. The decline is hypothesized to result from the increased number of private seed companies in Kenya, which rose from about 67 in 2008 to 90 in 2012. Only registered seed traders are allowed to import seed into Kenya after completing a seed regulation form (SR-14) and obtaining a Plant Import Permit (PIP) from KEPHIS. All seed imported into the country must fulfill ISTA requirements in addition to satisfying the relevant phytosanitary measures, including laboratory quality tests upon arrival. This lengthy variety testing and registration, which on average takes about two years, is responsible for the limited seed trade between Kenya and the rest of its neighbors. Imported seed is duty- free, although importers are required to pay an Import Declaration Fee of 2.25 percent of the cost, insurance, and freight (CIF) value, as well as a handling and documentation charges of 0.65 percent of the CIF value. Figure 8 shows total imports in relation to total domestic production (formal sources). Figure 9 shows the growth in imports over time. Figure 8: Certified seed production (formal sources) versus Imports (2005–10) Source: Economic Review of Agriculture, Various Issues, MOA, Nairobi, Kenya 16 Figure 9: Trends in certified seed imports, Kenya (2005–10) Source: Economic Review of Agriculture, Various Issues, MOA, Nairobi, Kenya V: Doing Business in certified seed in Kenya As noted, by virtue of its market power, KSC can set a uniform price for most certified seed; any variation in seed prices (particularly of maize) results from factors such as transportation and handling costs (Smale and Olwande 2011). In addition to its strong presence in Kenya, KSC maintains market outlets in Tanzania, Malawi, and Uganda. KSC’s marketing channel is well defined. It sells to seed merchants or agents who handle volumes of 500 tons or more each year. Agents sell to subagents who deal with volumes of 30 tons per year; subagents in turn sell to the stockists and agro-dealers who sell to farmers. In January 2012, Kenya had 5,284 trained and certified seed dealers and stockists. The actual figure might be much higher, considering that some unregistered and “illegal” agro-dealers operate in remote villages (Odame and Muange 2010). The significant increase in numbers of agro-dealers in Kenya over the past decade (Figure 10) is mainly responsible for the increase in use of certified seed. 17 Figure 11 shows the extent to which agro-dealers have embraced the trade in certified seed—a clear indication that the seed industry is profitable and attractive to private sector actors. Research has shown that an increased density of seed traders or dealers and a reduction in the distance traveled by farmers to source agro-inputs all significantly affect the quantity of inputs used by famers (Smale and Olwande 2011). Recent surveys by Tegemeo Research Institute found that the average distance to the nearest source of hybrid maize seed is 3.9 kilometers and that distance to seed sources can range from as much as 18.7 kilometers in areas with low agricultural potential to as little as 1.5 kilometers in areas with high potential. Seed sellers are usually nominated or appointed by seed merchants, and according to Kenya’s seed laws should possess “knowledge, ability, and appropriate facilities to maintain the quality and viability of the seed offered for sale.” Every year, each seed company must present KEPHIS with a list of traders aspiring to become its stockists (who have completed an application for a seed seller’s license). KEPHIS then presents the lists to the District Agricultural Committees, which discuss each applicant’s character and suitability for the business and provide KEPHIS with a list of approved applicants. KEPHIS inspects the seed stores of the approved applicants and issues licenses to those whose stores are found to be in satisfactory condition (capable of storing seed to maintain its quality and viability). The application fee for registration as a seed stockist is Ksh 1,000, and the annual licenses fees are Ksh 500 (Odame and Muange 2010). Figure 10: Number of certified agro-input dealers in Kenya (2003–12) 6000 5000 4000 3000 Number of input dealers 2000 1000 0 2003 2004 2005 2012 Source: Chianu et al. 2008; KEPHIS, personal communication, 2012. 18 Figure 11: Distribution of commodities stocked by agro-dealers Seed Pesticide Commodity stocked Fertilizer Vet drugs Animal feed Building materials Other Human drugs 0 20 40 60 80 100 120 % of agrodealers stocking commodity group Source: Odame and Muange 2010. The largest amount of maize for marketing is purchased by the National Cereals and Produce Board (NCPB) (Figure 12), a parastatal mandated by the government to purchase strategic reserves to use following poor harvests. With its large presence as a buyer of maize, the NCPB essentially sets the maize grain price in the country. During the survey for this report, respondents observed that once NCPB purchases sufficient maize to satisfy its strategic reserve requirement, the maize grain price plummets. Private traders usually delay their purchases, knowing that farmers have few marketing options as soon as NCPB temporarily exits the market. This practice in effect distorts the market by significantly affecting the seed to grain price ratio, which has a very important effect on the profitability of the seed business. 19 Figure 12: Proportion of maize sold to different buyers by districts Source: Tegemeo/Michigan State University Maize Value Chain Survey 2009. The empirical evidence indicates that a hybrid maize seed business is viable and profitable when the price ratio of certified/hybrid seed to grain is in the region of 5:1 (and 2:1 for basic grains such as maize, wheat, and barley), especially during the emergence and growth phases of the maize seed industry. At a low seed to grain price ratio of about 5:1, the yield advantage of hybrid maize for smallholders need not be very large for hybrid seed to be attractive to both farmers and traders (Morris et al, 2007) At a high ratio of 20:1, however, the yield advantage of hybrid seed often must be considerably higher if a seed business is to be attractive and profitable. Because temporal and spatial price variations are prevalent in the production and marketing of maize grain in Kenya, the price ratio supplied here was estimated based on annual average values reported by stakeholders. The survey found that prices of hybrid maize seed were Ksh 1,200 for a 10-kilogram package and Ksh 2,800 for a 25-kilogram package, whereas the price of a 90-kilogram bag of maize grain ranged between Ksh 1,800 and Ksh 4,700 but stabilized at about Ksh 3,000 on average. Thus the estimated hybrid maize seed to grain price ratio was 5:1. Figure 13 shows the trend in the seed to grain price ratio of hybrid maize in Kenya, which is very consistent with a viable hybrid seed market in the development stage. Kenyan seed to grain price ratios seem to have followed a favorable path for the development of a viable seed industry, ranging from under 5 to slightly above 10 over the past decades (Smale and Olwande 2011). This ratio is quite conducive for the hybrid maize seed business in Kenya, but in other crops the ratios of improved seed to output are not as favorable. To achieve the kind of progress seen in the hybrid maize seed industry in the past decade, changes are needed in seed production and marketing policies for other staples. 20 Figure 13: Ratio of hybrid maize seed price to the maize grain price Source: Odame and Muage 2010; Tegemeo Institute of Agricultural Policy and Development 2006–12. 3.1.2 Access to Fertilizer Table 2: Summary of indicators for access to inorganic fertilizer by farmers Category Indicator Base year/period and value Fertilizer use and Proportion of farmers using fertilizer on any field (%) 50% consumption Proportion of farmers using fertilizer on maize field 80% (%) Average total fertilizer consumption (t), 2004/05– 444,463.5 t 2010/11 Percentage of farmers applying fertilizer at 35% recommended rates Average fertilizer application rate/use intensity on 177 kg/ha (81 kg of maize area only nutrient) Average fertilizer applied to all crops (kg/ha) 100 kg/ha (46 kg of nutrient). FAO estimate is 32.45 of nutrient. Proportion of Fertilizer use by type of crop: Cereals 74.7 % Tea 12.9 % 21 Horticulture 6.7% Coffee 5.5 % Tobacco 0.1 % Cost, risk, and profitability CIF price Mombasa (current prices) of a ton of fertilizer: of using fertilizer DAP US$ 676.7 Urea US$ 560.6 Average cost per ton to main agricultural zones including transportation and handling: DAP US$ 886.1 Urea US$ 757.1 CIF price as % of price paid by farmers: DAP 76.4% Urea 74.0% Of the costs paid by farmers, transaction costs thus account for about 23.5% (for DAP) and 26% (for urea). Average value–cost ratio for maize: 2004 2.33 2007 1.92 2010 2.06 Average (1997-2010) 2.14 Average value–cost ratio for maize and wheat only 2.52 Nutrient–output price ratio (Pn/Po) for maize (2010) 7.96 Nutrient–output price ratio for wheat (2010) 8.77 Timeliness in the Percentage of farmers reporting late arrival of 60% importation and fertilizer application of fertilizer Private sector participation Number of private companies/firms involved in About 12 commercial in the fertilizer market procuring, importing, and distributing inorganic fertilizer importers fertilizer operate in the country, with an estimated 500 wholesalers and about 8,000 retailers, including 5,284 agro- dealers certified by KEPHIS. Agro-dealer density: Number of agro-dealers per 5.8 10,000 farmers Share (%) of inorganic fertilizer imported and 80% distributed to farmers through private companies (market share of private companies) after the government reentered the fertilizer market in 2009/10. In 2012, the government intends to import 22 about 200,000 t of fertilizer, which will translate to about 40% of imports. Before that time, the private sector was importing 100% of fertilizer. Ease of private sector participation in the 4.0 fertilizer market (Scale 0–5)” Taxes and subsidies on Subsidies as % of total cost of fertilizer 40% (provided to fertilizer selected poor farmers with a farm size of 1 ha or less in about 84 districts). Taxes and tariffs as % of total cost of fertilizer. 0% (zero rated); IDF Currently fertilizer is zero rated, but an Import of 2.25 % of CIF Declaration Fee (IDF) of 2.25% of CIF applies price. Experts have documented the significant output and yield increases that can be achieved if farmers could adopt recommended packages that include all critical factors of production (certified seed, fertilizer and pesticide/herbicides). Chemical fertilizers when applied in synergy with other modern inputs could significantly increase yield, yet most farmers in Africa have not taken full advantage of fertilizer to generate a marketable surplus and move out of subsistence agriculture and into the mainstream market economy. This section presents indicators that can help policy makers and other stakeholders undertake reforms if necessary to promote fertilizer consumption. Although it is true that differences in fertilizer application rates may be influenced by variations in soil and agro-ecological conditions, it is also true that across most of sub-Saharan Africa, fertilizer use is very low. It must increase significantly across the board if agriculture is to be profitable and stimulate entrepreneurship along agribusiness value chains. I: Fertilizer procurement and distribution in Kenya Kenya relies heavily on imports for its supply of chemical fertilizer, as the amount of fertilizer manufactured in the country is quite insignificant compared to its requirements. Kenya stands out as one of the few African countries where fertilizer application seems to have increased in a sustained manner in the last two decades. This increase has been attributed to a number of factors, including liberalization of the fertilizer markets in the 1990s, which eliminated price controls and import licensing quotas, lifted foreign exchange controls, and phased out the external fertilizer donations that had disrupted commercial operations. Investors responded to these reforms by investing in private fertilizer distribution. Studies have shown that these reforms ultimately caused fertilizer application rates in the high-potential areas of Western Kenya to more than double, approaching rates used by farmers in Asia and Latin America (Minde et al. 2008). Research suggests that Kenya’s growing fertilizer consumption is occurring on smallholders’ land and is not driven by large-scale or estate agriculture (Minde et al. 2008). Currently, about 12 main fertilizer-importing companies operate in Kenya. Four have a combined market share of more than 85 percent, which has led to frequent accusations by stakeholders, particularly government officials, of possible collusion to push prices to levels well beyond what smallholders can afford. For this reason, the government decided under the Enhancing Agricultural Productivity Project to reenter the fertilizer market in 2009/10 by scaling up (Kilimo Plus) the existing input voucher scheme (Kilimo Bora) in 84 selected districts through 23 the National Accelerated Agricultural Inputs Access Program. Kilimo Plus is designed to enable smallholders operating on one hectare or less to access 10 kilograms of hybrid seed, 50 kilograms of basal fertilizer, and 50 kilograms of top-dressing fertilizer for their privately owned farms. These inputs are sufficient for approximately 1 acre (0.4 hectares) of maize (MoA 2012). In 2009 the government imported substantial amounts of fertilizer through NCPB to be distributed through its branches and selected private retailers at prices that included a 40 percent subsidy; in 2010, the government imported 75,000 tons (1.5 million bags) of fertilizer; and in 2012, it is projected to import about 200,000 tons or 40 percent of all fertilizer used in Kenya. Thus two decades after exiting the fertilizer market, the government has reentered. Its presence in the fertilizer market, aside from being distortionary, has revived allegations of fertilizer diversion and corruption in the awarding of contracts to import fertilizer.1 II: Fertilizer supply and consumption In Kenya, the four main fertilizers used are nitrogen-phosphorus-potassium (NPK) blends, urea, diammonium phosphate (DAP), and calcium ammonium nitrate (CAN), with DAP and CAN being the most dominant. With the liberalization and phasing out of the subsidy programs, fertilizer consumption rose from a mean of about 180,000 tons per annum during the 1980s to 250,000 per year during the early 1990s. Between 2000 –03 and 2004–06, annual consumption increased from 325,000 tons to over 400,000 tons. In the 2009/10 cropping season, Kenya consumed 503,784 tons of fertilizer. Estimates for 2010/11 were about 532,205 tons (MoA 2011). Figure 14 shows the recent trend in fertilizer imports and consumption while Figure 15 shows fertilizer use by types of use and Figure 17 depicts the distribution of fertilizer use by crop. Most fertilizer is used on cereals (food crops), in line with the government’s food security objectives. Figure 14: Fertilizer imports and consumption in Kenya (2004/05–2010/11) 1 See, for example, http://allafrica.com/stories/201203011398.html. 24 600000 500000 400000 Quantity (t) 300000 Imports Consumption 200000 100000 0 2004/05 2005/06 2006/07 2007/08 2008/09 2009/10 Year Source: MoA Economic Review 2011. 25 Figure 15: Fertilizer consumption (t) by type of use (2001 –11) Source: MoA Economic Review 2011. Figure 16: Fertilizer consumption (%) by type of use (2001–11) Source: Author’s calculation; original data from MoA. 26 Figure 17: Fertilizer use by crop category as a percentage of total use, 2005/06–2010/11 Source: IFDC, 2012. III: Intensity of fertilizer use Kenya’s diverse agro-ecological environment is suitable for producing a wide range of crops and influences the range of fertilizer types and application rates used throughout the country. Figure 18 shows fertilizer rates in the main agro-ecological zones. Although rates have increased significantly in the last decade, they are dismal in the low-potential Coastal Lowlands, Eastern Lowlands, Western Lowlands, and Marginal Rain Shadow areas. Limited fertilizer use in those areas is partially responsible for the low national average maize yields in Kenya, despite the fact that maize yields in certain high-potential areas reach 6 tons per hectare. The average application rate on maize farms increased from 138 kilograms per hectare in 1997 to 177 kilograms per hectare in 2010 . A sudden but temporary decline in fertilizer use in 2007 was precipitated by the political violence that followed the general elections and displaced the majority of farming communities. Data from FAO and the Ministry of Agriculture estimate that Kenya’s cultivated maize area is ap proximately 1.66 million hectares. Only about one-third (approximately 0.58 million hectares) is fertilized (IFDC 2012). In line with the general trend of increasing fertilizer consumption, however, the percentage of households applying fertilizers on their farms has also increased (Figure 20). 27 Figure 18: Fertilizer application rates (kg/ha) by agro-ecological zone (1997–2010) Source: IFDC 2012. 28 Figure 19: Fertilizer use per hectare of maize and arable land (1997–2010) Source: Tegemeo Research Institute; MoA; Ariga and Jayne 2009; Sheahan 2011. Figure 20: Percentage of farmers applying fertilizer (1997–2011) Source: Tegemeo Research Institute; MoA; Ariga and Jayne 2009; Sheahan 2011. 29 Kenya’s upsurge in fertilizer consumption and use can be explained by a combination of factors. First, as noted earlier, a number of policy reforms strengthened private sector development and reduced market distortions in the fertilizer industry. These positive reforms encouraged private investors to enter the fertilizer market in a competitive manner that promoted market penetration, lowered prices considerably, and stimulated demand for the input. Such reforms included the elimination of import and licensing quotas, the deregulation of foreign exchange and retail price controls, as well as the reduction or streamlining of fertilizer subsidies to prevent the crowding out of private actors in fertilizer procurement and marketing.2 By and large, the most significant factor to have enhanced fertilizer consumption was the development of the agro- dealer network through the CNFA)/Agricultural Market Development (AGMARK) program. By providing training and helping private dealers obtain credit for the commercial provision of agro-inputs to farmers (IFDC 2012), the program increased the number of agro-dealers and thereby reduced the distance that farmers had to travel to obtain inputs. The effect of reducing the distance to fertilizer sales outlets is reflected in the changes in fertilizer use over the last decade (Figure 21). The less distance a farmer has to travel to obtain fertilizer, the more fertilizer the farmer applies. Figure 21: Trends in distance traveled by farmers and fertilizer application (1997–2010) Source: Odame, , and . Muange, 2010 Note: Figure for 2010 is an estimate derived from the increase in the number of fertilizer sellers since the last national survey in 2007. 2 Most policy analysts regard the government’s recent reintroduction of fertilizer subsidies for smallholders (as discussed in section I) as likely to cut agro-dealers out of the market and undermine the successful distribution network that has developed. 30 IV: Profitability of fertilizer use Fertilizer prices vary within Africa’s regional economic communities as well as within their member countries, but in general fertilizer prices are much higher in Africa than in any other region of the world, and these high costs are largely responsible for the low use of fertilizer throughout the continent. Fertilizers are costly in Africa for a number of reasons (see Morris et al. 2007). This section of the report focuses on how fertilizer prices are established at Kenya’s ports of entry and investigates fertilizer cost components within the domestic market. What proportion of the local fertilizer cost is attributable to transportation, handling, and similar charges? The agribusiness indicators used in this analysis should help to explain the reasons behind these costs and therefore inform policies and actions that can be introduced to reduce them. In Kenya, although no tariffs or import duties are applied to fertilizer imports, approximately 20 other cost elements are added to the CIF price and are responsible for the apparent high cost of fertilizer at the market and farm gate. In 2011, the CIF price at Mombasa Port for the two main fertilizers used in the country were US$ 676.7/t (Ksh 3,044.0)3 for a 50-kilogram bag of DAP and US$ 560.6/t (Ksh 2,521.5) for a 50-kilogram bag of urea. The retail price for DAP in the main agricultural zone of the Rift Valley was US$ 886.1/t (Ksh 3,946.3) per 50-kilogram bag of DAP and US$ 757.1560.6 (Ksh 3,368.6) for a 50-kilogram bag of urea. In other words, the CIF prices accounted for about 75 percent of the fertilizer price paid by farmers. As much as 25 percent of fertilizer price is attributable to inland costs, including the profit margins for the distributors. Figure 22 shows the disaggregated fertilizer cost components in Kenya. Figure 22: Cost components of fertilizer in Kenya Source: Original data from MoA, 2012 3 The exchange rate prevailing at the time of this study was US$ 1 – Ksh 90. 31 Unlike most countries in sub-Saharan Africa, with the possible exception of South Africa, in Kenya a significant proportion of farmers (more than 70 percent) use inorganic fertilizers on their maize farms. In Kenya, the value– cost ratio (VCR) for fertilizer, which measures the economic returns of fertilizer to crop enterprises in Kenya, generally has been favorable (all the VCRs are greater than one) (Table 3). Every additional dollar invested in fertilizer would return more than one dollar to farmer in most zones, although spatial differences exist as a result of different rates of applications (Sheahan 2011). Similarly, the nutrient–output price ratio is also very favorable (Table 4). One main reason for the relative profitability of fertilizer use among farmers in Kenya is that while the Mombasa CIF prices of fertilizers have remained fairly constant over the years, the price of fertilizer in major food-producing areas like Nakuru has dropped significantly following the structural transformation of the fertilizer market in Kenya (Figure 23). Table 3: Fertilizer value–cost ratio on maize by ecological zone, Kenya (1997–2010) Ecological zone 1997 2000 2004 2007 2010 Average (1997– 2010) Eastern Lowlands 4.09 5.30 4.95 4.56 4.58 4.67 Western Lowlands 1.59 2.12 2.16 1.89 2.13 1.98 Western 1.33 1.40 1.45 1.00 1.10 1.26 Transitional High Potential 1.09 1.14 1.19 0.88 0.98 1.06 Maize Western 1.65 1.47 1.80 1.22 1.43 1.51 Highlands Central Highlands 2.57 2.53 2.41 1.96 2.12 2.32 Country average 2.05 2.33 2.33 1.92 2.06 2.14 Source: Original data from Sheahan 2011. Table 4: Nutrient–output price ratio (1997–2010) Ecological zone 1997 2000 2004 2007 2010 Average (1997– 2010) Eastern Lowlands 11.40 8.50 7.82 9.58 8.58 9.12 Western Lowlands 18.10 15.75 13.36 16.24 12.20 15.13 Western 11.10 10.45 9.46 12.40 11.14 10.91 Transitional 32 High Potential 12.85 12.20 9.80 13.38 11.42 11.93 Maize Western 13.65 10.40 20.36 12.62 10.62 13.53 Highlands Central Highlands 8.15 7.75 7.94 10.64 9.74 8.84 Country Average 12.54 10.84 11.54 12.47 10.62 11.58 Source: Original data from Sheahan 2011. Figure 23: Prices of diammonium phosphate (DAP) in Mombasa and Nakuru (constant 2007 Ksh per 50- kg bag) Source: Adapted from Ariga and Jayne 2009; original data from MoA; FMB weekly fertilizer reports for CIF Mombasa. Note: Nakuru is a maize-producing area in the Rift Valley of Kenya, 645 km (400 mi) by road from the Port of Mombasa. V: Doing Business in fertilizer: Private sector participation in the fertilizer market The favorable business environment for the fertilizer industry in the last decade has largely been attributed to stable government policies around fertilizer and related inputs. The government abolished controls and regulations (including tariffs and large, untargeted subsidies) that distorted the input market, undercut the private sector, and made the fertilizer market unprofitable and unattractive to potential investors. The reforms proved very successful and are largely responsible for the growth and expansion of private sector involvement in the fertilizer market in Kenya. In addition, complementary programs to support smallholders’ productivity, such as the Farm Input Promotions program, the CNFA agro-dealer training and credit program, and the organization of farmers into 33 groups to facilitate access to extension and credit services under the Kenya Market Development Program, all contributed to raising the awareness and use of fertilizer and promoted an active role for the private sector in the fertilizer industry. In response to the stable input policy environment, the fertilizer distribution network expanded tremendously when reforms began in the early 1990s. Today about 12 commercial fertilizer importers operate in Kenya, with an estimated 500 wholesalers and about 8,000 retailers. Kenya’s fertilizer market is generally free from disruptive government interventions and is very competitive and conducive for private actors to do business. This leverage for the private fertilizer industry greatly stimulated fertilizer consumption and use. Kenya’s successful experience with fertilizer reform has been cited as a model of how a stable po licy environment can “foster an impressive private sector response that supports smallholder agricultural productivity and poverty reduction” and thus helps to reduce food insecurity (Minde et al. 2008). Although still fragile, the model is regarded as worthy of emulation by African countries where low input use is caused by cumbersome government rules and regulations and ad hoc policy changes that distort the input market and discourage private investors from entering. 3.1.3 Agricultural Mechanization and Access to Mechanical Technology Table 5: Summary of indicators on access to agricultural mechanization (tractors) in Kenya Category Indicator Base year/period and value Availability of tractors in Number of tractors in the country 14,400 the country Number of tractors per 100 km2 of arable land 26.9 Number of tractors per 1,000 ha 3 Estimated total horsepower (HP) of tractors in the 1,460,160 HP country Estimated average HP per 100 km2 2755.0 HP Average HP/ha arable land 0.28 HP/ha Cost of mechanization Average cost of buying a tractor in the country: Pedestrian-controlled (18–30 HP) Ksh 1.6 m (US$ 20,000); Small range (40–80 HP) Ksh 2.6 m (US$ 32,500) Medium range (90–120 HP) Ksh 3.9 m (US$ 48,700) Large range (>120 HP) Ksh 6.5 m (US$ 81,250) Cost of renting a tractor for plowing 1 ha: First plowing: Parastatals (ADC) Ksh 2,500 (US $31.25) Private sector Ksh 4,000 (US $50) 34 Second plowing: Parastatals (ADC) Ksh 800 (US$ 10) Private sector Ksh 2,000 (US $25) Cost of disc harrowing 1 ha: Parastatals (ADC) Ksh 1,200 (US$ 15) Private sector Ksh 2,500 (US$ 31.25) Taxes and tariffs on Taxes and tariffs paid on imported tractors 0% (zero rated, no tractors and tractor spare duty) parts Tariffs and taxes on imported spare parts 16% (duties and VAT) Private sector participation Number of tractors imported by the private sector as 100% in the tractor business a percentage of the number of tractors imported in 2010 Perception of stakeholders on government 5.0. Government does intervention and crowding out of the private sector not intervene in the (Scale: 0–5; 0 if the sector is entirely controlled by tractor market directly, the government and 5 if the tractor market is fully although some liberalized) parastatals would either import or buy directly from importers. Useful life of tractors in Total years (useful life) that tractors work effectively 11 years on average. Kenya (are fully functional and operating) Average number of engine hours delivered by 15,000–20,000 engine tractors hours It has been argued that the full benefits of using multiple modern agronomic inputs (improved seed, fertilizer, pesticide, and irrigation) cannot be realized without using improved tools and machinery. Mechanization reduces the drudgery of agriculture and frees farm labor for other, often more productive, purposes. Tractors are regarded as the most important and versatile equipment used by farmers wanting to mechanize some or all of their farm operations. Apart from providing an important means of transporting heavy farm inputs and produce to and from farms, tractors are useful with other motorized and non-motorized implements for the efficient and timely land preparation needed to achieve high yields and minimize post-harvest losses (FAO 2008a). In Kenya, smallholders have as a matter of necessity embraced the use of tractors for land preparation, particularly for tillage and harrowing. In Kenya’s high-potential Rift Valley and Western Lowlands, heavy rainfall sometimes causes soils to become waterlogged and to cake at the onset of the planting season, making land preparation with simple hand implements difficult and very labor intensive. In addition, the exodus of able-bodied youth from farms has accentuated the need for tractors and other motorized farm equipment. Recent figures show that the average age of farmers in Kenya today ranges between 50 and 60 years, up from about 40 –45 years a decade ago (MoA 2012). The aging cohort of farmers and the need to plant at the optimal time to obtain the best yields have exacerbated the demand for and shortage of tractors in the country. 35 I: Number of tractors and horsepower per 100 square kilometers of arable land Given the importance of tractors in enhancing farm productivity, the number of tractors on a given area has been identified as a good indicator for measuring the relative ease or difficulty with which farmers access and hire tractors for farm operations. The present level of agricultural mechanization in Kenya ranges from 95 percent on large farms to as little as about 4 percent on some smallholder farms (MoA 2011). On the whole, it is estimated that only about 30 percent of farm operations on small farms in Kenya are done using tractors and powered equipment. About 50 percent of cultivated land is prepared using hand tools, and the remaining 20 percent is prepared using animal- drawn implements. In other words, considerable scope exists for scaling up the use of mechanization, especially among the smallholders who produce more than 75 percent of the agricultural output in the country. In Kenya’s arid and semi-arid lands, for example, about 460,000 hectares of old land and about 180,000 hectares of new land offer little scope for using animal power and are available for mechanization, yet this large expanse is still greatly underutilized owing to the shortage of tractors and mechanical farm inputs. Currently, Kenya has an estimated fleet of about 14,400 tractors that are still within their economic lifespan; more than 70 percent are medium-sized tractors between 80 and 120 horsepower (HP). An additional 30,000 tractors are thought to have outlived their economic life or to be out of commission for various reasons. Of the number remaining within their economic lifespan, about 50 percent are out of commission at any point time because of mechanical failure, inadequate operating and servicing capital, or just inadequate after-sales service (MoA 2011). The degree of mechanization in Kenya is therefore about 3 tractors per 1,000 hectares or 26.9 tractors per 100 square kilometers. Table 6 presents data on the average HP of tractors per 100 square kilometers of arable land. Table 6: Estimate of total tractor horsepower (HP) per 100 square kilometers in Kenya, 2011 Tractor capacity Probability of Number in the Midpoint Total HP in distribution country for of HP each group (Pi) each groupa 70–80 HP 0.20 2,880 75.0 216,000 81–120 HP 0.70 10,080 100.5 1,013,040 121–200 HP 0.10 1,440 160.5 231,120 Total 14,400 1,460,160 Average HP/ha arable landb 0.28 HP/ha Average HP/100 km2 arable 2,755 HP/100 land km2 Source: MoA 2011; Field Survey 2011/12. a About 14,400 tractors were estimated to be in Kenya in 2011. b Total arable land under cultivation in Kenya in 2011 was about 53,000 km2. II: Cost of hiring/renting tractors With the devolution and partial privatization of many government parastatals, the government is no longer directly involved in the provision of tractor hire and maintenance services, although the Ministry of Agriculture through ADC and other specialized agencies rents tractor and earth-moving equipment to farmers at subsidized rates. The 36 services are spread across the country in Agricultural Mechanization Services Stations at Nyahururu, Naro Moru, Ruiru, Mariakani, Garsen, Machanga, Kitui, Mitunguu, Makueni, Garissa, Mandera, Kisumu, Siaya, Migori, Kajiado, Kipkelion, Nakuru, Narok, Kitale, Eldoret, Marigat, Samburu, and Bumala. Interviews with key ADC officials revealed a serious dearth of functional tractors to serve the teeming population in the former Uasin-Gishu District. At the time of the interview, about 15 tractors were in the machinery pool and only 6 were in good working condition. The consequence is long queues and delays for farmers who want to take advantage of the cheaper ADC tractor hiring and mechanical services. Table 7 shows the average cost of hiring tractors for harrowing and plowing through parastatals and private machinery services. Table 7: Average cost of hiring tractors for farm operations in Kenya (2011/12) Farm operation Amount charged by: ADC and other parastatals Private sector actors Ksh US$ Ksh US$ st 1 plowing 2,500 31.25 4,000 50.00 nd 2 plowing 800 10.00 2,000 25.00 Harrowing 1,200 15.00 2,500 31.25 Spraying and herbicides 800 10.00 1,200 15.00 Source: Field Survey 2011/12. Field visits and interviews with some of the agricultural machinery centers reveal some innovations in the fabrication and manufacturing of simple farm implements and tractor spare parts as a way of reducing the cost of keeping tractors running. For example, the Kitale Branch of the ADC, located in a high-potential maize production area, is a good case of how a local institution can respond to farmers’ demands by fabricating spare parts and edesigning machinery to adapt to the prevailing circumstances of local small-scale producers. This kind of innovation is necessary for leveraging agribusiness in a developing country. III: Private sector perceptions of the agricultural machinery market The agricultural machinery industry in Kenya is currently dominated by the private sector. In recent years the government has continued its divestiture and privatization of parastatals to make them profitable and self- sustaining. The result is that private companies, rather than the government, now import tractors. Most importers represent established tractor manufacturing firms overseas, and each private importer specializes in specific brands. Table 8 shows the total number of tractors imported into the country by model/make. From the table, it is apparent that Massey Ferguson and Ford brands accounted for more than 90 percent of the tractors imported in the country between 2004 and 2010. Figure 24 shows that tractor imports appear to have spiked as a direct response to the high food prices of 2007/08, as farmers sought to take advantage of high food prices and increase their scale of production. 37 Figure 24: Tractor imports, Kenya (2004–10) Source: MOA, Annual Report, Various Issues Table 8: Types of tractors imported into Kenya (2004–10) Tractor type 2004 2005 2006 2007 2008 2009 2010 Total Massey 39 66 119 367 678 211 67 1,480 Ferguson Ford/New 115 112 146 434 439 213 460 1,459 Holland SAME 0 0 0 35 8 2 54 45 John Deere 3 2 4 53 1 28 0 91 Fiat 0 0 0 10 0 4 0 14 CASE 0 0 0 0 12 48 0 60 Other 2 3 3 22 55 0 40 85 Total 159 183 272 921 1193 508 621 3,234 Source: Agricultural Engineering Services, MoA. IV: Useful life of tractors in Kenya The useful life of tractors varied and was largely determined by the brand and type of tractor, the availability of spare parts, and after sales service. The availability of service centers, which is vital for extending the economic life of tractors, varied from one location to the next, depending on where government parastatals involved in tractor hiring and servicing centers were located. As noted, ADC branches in most districts in the food basket area of the 38 Rift Valley are fairly well equipped to service the tractors of commercial farmers within their jurisdiction. Nonetheless, limitations on tractor servicing and maintenance continue to be major constraints on the provision of tractor services to farmers in most area of country. Interviews with stakeholders indicated that the best quality tractors in Kenya can deliver on average up to a maximum of 15,000–20,000 engine hours, working an average of 1,000–2,000 engine hours per year during the lifecycle of the tractors, which ranges from 8 years to about 12 years. Stakeholders in the recently “privatized” parastatals such as ADC and similar government institutions (for example, agricultural colleges such as Bukura College and Egerton University) revealed that tractors in their fleets could deliver up to 30,000 engine hours and remain in operation for 15 years or more. This relatively long lifespan could result from good maintenance, given that such institutions and organizations are usually equipped with well-trained technicians with many years of practical experience. It is logical to conclude that the lack of well-trained technicians and good service centers, coupled with the high cost of spare parts, could be responsible for the fact that more than 50 percent of tractor fleets in the country are out of commission at any time (MoA 2011). Table 9 shows the average useful life of various brands of tractors. The information comes from interviews with key stakeholders in this industry, including the importers, government parasatatals, the Ministry of Agriculture’s Agricultural Engineering Department, Kenyan Farmers Association, ADC, as well large-scale farmers who rent tractors to small-scale famers in their localities. Table 9: Average useful life of tractors in Kenya (2011/12) Type and brand of tractor Useful life (years) Massey Ferguson 10–15 Ford 10–15 New Holland 10–12 CASE 10 John Deere 10–12 Fiat 8-10 SAME 10–12 Averagea 11 Source: Field Survey 2011/12. a Simple average. V: Tariffs/taxes on tractors and tractor spare parts Tractors and other equipment imported for farming and agricultural purposes are zero rated, and as such they are exempt from all duties and tariffs. Many investors and dealers in agricultural tractors and machinery believe that exemption has helped to lower the delivery cost of tractors to private and government agencies. Even so, the capital outlay to purchase the high-quality tractors that most farmers prefer, especially given the soil characteristics in high- potential areas such as the Rift Valley and Western Kenya, is still huge. 39 Although tractors can be imported duty free, the importation of spare parts is subject to duties and VAT of about 16 percent. The CIF price for tractors varies by brand and size. On average, prices for Massey Ferguson and New Holland pedestrian-controlled tractors (18–30 HP), small-range (40–80 HP), medium-range (90–120 HP) and large- range tractors (>120 HP) were respectively Ksh 1.6 million (US$ 20,000), Ksh 2.6 million (US$ 32,500), Ksh 3.9 million (US$ 48,700), and Ksh 6.5 million (US$ 81,250) (CMC Motors Ltd., Nairobi, 2011; Kenya Revenue Authority 2012. VI: Doing Business in agricultural machinery (tractors) in Kenya The market for tractors and other heavy farm equipment in Kenya tends to be concentrated in very few hands. Findings from the field survey suggest that only three firms, including CMC Motors Ltd. and two other companies representing Ford and New Holland, supply about 90 percent of the tractor imports (Table 8). Even so, there was no apparent collusion among the dominant three firms, as each specialized in a particular brand or model. The low volume of imports and hence trade in tractors was the result of the very considerable initial capital outlay needed to purchase tractors. Lack of agricultural credit and the high cost of spare parts and servicing were also identified as constraints to the trade in this versatile and important input that is necessary for commercial agriculture and leveraging agribusiness in Kenya. 3.2 Enabling Environment: Access to Financial Services and Transportation Financial services are a critical enabling factor for sustainable economic growth and for private sector participation in agriculture (FAO 2008a). Although an important factor for private sector development in general, access to finance is significantly more difficult for entrepreneurs in the agricultural sector and more so for smaller agro-based firms. According to Thoburn (2002), in Africa transport cost is a greater barrier to exports than the customs tariffs faced by importing countries. Sub-Saharan Africa’s average freight costs are more than 20 percent higher than those of other countries around the world. For some goods, such as clothing, textiles, and footwear, in which Africa potentially has a comparative advantage, average transport costs are 15–20 percent of the total cost of production (Limão and Venables 2000). 3.2.1: Access to Financial Services Table 10: Summary of indicators for access to finance Category Indicator Base year/period and value Commercial lending to Percentage of commercial bank lending 5.7%—despite the government agriculture (2006–11) to the agricultural sector in overall mandate that commercial banks devote portfolio 17–20% of loans to agriculture. Total amount of credit provided to the 9–10% sector by all the domestic financial lending institutions in the country Loan performance by Agricultural sector’s share of total 5.3% the agricultural sector outstanding loans in the economy (2005–10) Percentage of nonperforming loans 8.5% (NPLs) (within agriculture) from commercial banks 40 Loan distribution by KCB 6% compared to 5.3% by all commercial banks in the country Nonperforming loans from the 3% compared to an overall average of agricultural loans by KCB 8.5% by all the commercial banks. Cost of credit and Average nominal deposit rate (2006– 3.68% financial services 11) Average nominal lending rate (2006– 14.19% 11) Interest rate spread (2006–11) 10.51%. Although the average lending rate for the private sector was about 14%, interviewees in the sector said that loans to agriculture attracted higher interest rates of 20–25%. Access to credit and Access to banking by rural dwellers 17.8% financial services Access to banking by urban dwellers 40.3% Access to banking by women 17.8% Access to banking by men 27.9% Exclusion of rural women compared to Rural women have an exclusion rate of urban women 73% percent compared to 43% for urban women Number of rural branches for 181 in 2005; 436 in 2010 commercial banks Commercial bank urban branch density 15,151 persons per urban branch (or (ratio of number of people per urban 6.6 branches per 100,000 people). branch) Commercial bank rural branch density 72,290 people per rural branch (or 1.4 (ratio of number of people per urban branches per 100,000 people). branch) Access to finance by farmer-based Most FBOs in Kenya are cooperatives organizations (FBOs) and farmers’ organizations. In addition to these FBOs, Kenya has a specialized bank (AFC) that is mandated to extend credit to the agricultural sector. In 2012, the AFC had 48 branches; 41 were located in rural areas. Financial inclusion: Percentage of 41% adults accessing credit Warehouse receipt Existence of a WRF system and extent NCPB has one of the widest networks financing (WRF) system to which it is established and functional of warehouses throughout Kenya, with a storage capacity of over 1.5 million t. Despite the presence of this infrastructure, the WRF system is not yet in place. At the time of the interviews (April/May 2012), no legal and regulatory framework was in place to establish a commodity exchange that 41 would include a WRF system to govern grain trade and facilitate (among other things) credit procurement by smallholders, who thus remain locked out of financial services. Leasing arrangements Existence of a law on leasing Yes. Several laws and amendments and movable property as exist to regulate leasing and the use of collateral movable property as collateral, including: the Chattels Transfer Act (Chapter 28, Laws of Kenya); Registration of Lands Act (Chapter 300, Laws of Kenya); Indian Transfer of Property Act–1882; and Government Land Act (Chapter 280, Laws of Kenya). The various laws and amendments provide a lessee with the use of specified capital goods on a financial or operating lease or hire- purchase agreement basis, without collateral, for a specified period. Existence of a law for the use of Yes. Businesses use movable assets as movable assets as collateral collateral while keeping possession of the assets, and any financial institution accepts such assets as collateral. Presence of a collateral registry Yes. Kenya has a collateral registry in operation. It is organized by geographic area and asset type and has an electronic database indexed by debtors’ names. Existence of credit reference bureau Yes. The sharing of credit information (CRB) through the CRB was launched in July 2010. As of June 30, 2011, the Central Bank of Kenya (CBK) reported that credit reports requested by institutions more than doubled to 728,553 from 284,722 in December 2010. CBK licensed Metropol Ltd. in April 2011 to operate as a credit reference bureau, making it the second credit reference bureau after CRB Africa, licensed in 2010. To underscore the role of an enabling environment in successful agribusiness in Africa, this section focuses on the following factors that could influence the availability of credit for agribusiness in Kenya: lending by commercial banks to the agricultural sector; the cost of and access to credit; banking sector efficiency as measured by the 42 interest rate spread; loan performance and default rates; and other factors such as the existence of warehouse receipts, the use of leasing arrangements, and the use of movable property and nonconventional collateral. I: The Kenyan financial system The poor in Kenya are characterized mainly by low levels of education, low levels of capital accumulation, and poor access to markets—traits that “all unfortunately are mutually reinforcing” in perpetuating food insecurity and poverty. (Ndung’u 2010) Increased access of the poor to financial services can provide shelter for their meager savings and widen their economic opportunities by providing the necessary capital for investment. It can also leverage their asset base and thus act as collateral for accessing credit through increased savings. Above all it can reduce their vulnerability to external shocks that increase hunger and food insecurity. In 2009, the National FinAccess Survey revealed that 32.7 percent of Kenya’s bankable population is totally excluded from both formal and informal financial services. If 46 percent are poor and 32.7 percent are unbanked, then most of the unbanked are the poor, who mainly engage in subsistence agriculture. Strategies to enhance financial inclusion therefore are a critical component for accelerating agricultural production, reducing poverty, and uplifting the majority of smallholders who occupy the bottom 30 percent in terms of wealth and economic wellbeing (Ndung’u 2010). Kenya’s financial sector has undergone significant transformation in the last few years aimed at leveraging access to credit, particularly by smallholders. In addition, significant barriers to entering the financial sector were lifted by removing minimum balance requirements, reducing the cost of maintaining micro accounts, and introducing new instruments targeting segments of the population with fewer resources. Above all, the novel deployment of mobile money transfer services (M-Pesa is an example) in 2007 had enabled 27.9 percent of the bankable population to access money transfer services by 2009 (and perhaps more by 2010). It also increased deposit accounts from 2.55 million in 2005 to 12 million in 2010. Mobile financial services—the use of mobile phones for person-to-person, person-to-business, business-to-person, and ATM payment transfers—have increased the number of resource-poor farmers with access to formal financial and banking services. Other reforms are the licensing of deposit-taking microfinance (DTM) institutions, including nationwide and community microfinance institutions. By 2010 Kenya had licensed two nationwide DTMs with 31 branches across the country, in locations closer to low-income people. Outreach also has been enhanced through the use of agents and the easing of requirements and specifications for establishing new branches. A Deposit Protection Fund has been introduced, which covers up to Ksh 100,000 (US$ 1,250)—92 percent of accounts in the financial sector. Additional reforms include the expansion of commercial banks’ branch networks, which had increased from 534 in 2005 to 1,030 by September 2010. This growth was driven mainly by competition and declining barriers to entry. The main beneficiary of growth in branch networks has been the rural sector. Networks grew by 140 percent in rural areas compared to 68 percent in urban areas (Ndung’u 2010). Despite these reforms, farmers still face major challenges in gaining access to bank credit. Physical distances isolate many individuals from formal financial services, although the increasing number of rural bank branches has somewhat reduced this constraint. Agriculture remains unattractive to formal providers of financial services, particularly commercial banks, because of the risks associated with agribusiness and complicated land laws and tenure rights that limit the use of land as collateral (MoA 2011). 43 In Kenya, as in most other African countries, the financial sector consists of a large number of formal, semiformal, and informal financial service providers. The formal provision of agricultural credit to farmers is dominated by a specialized bank, AFC. Established in 1963, AFC initially was a subsidiary of the Land and Agricultural Bank. In 1969, it was incorporated as a full–fledged financial institution under the Agricultural Finance Corporation Act (Chapter 323, Laws of Kenya). It was then tasked with assisting in the effective and peaceful transfer of land to indigenous farmers as well as injecting new capital to farm owners to encourage and accelerate agricultural development. Today, AFC is the leading government credit institution mandated to provide credit for the sole purpose of developing agriculture. It has 48 branches throughout the country; 41 are in rural areas of Kenya’s high - potential agricultural zones (AFC communication 2012). Aside from AFC, private financial institutions (commercial banks and NGOs) have started to provide agricultural financial services. Banks such as Equity Bank have been involved in giving credit facilities to dairy farmers in the country. Other banks involved in funding farmers include K-Rep and Family Bank. Several NGOs and other agencies actively participate in advancing financial and credit services to farmers in Kenya, including German International Cooperation (Deutsche Gesellschaft für Internationale Zusammenarbeit, GIZ) and Faulu Kenya. The government has also partnered with AGRA, Equity Bank, and the International Fund for Agricultural Development to establish a cheap credit facility of US$ 50 under the Kilimo Biashara campaign, which offers credit to farmers, agro-dealers, and agro-processors and is intended to reach 2.5 million farmers. Similar programs like the Njaa Marufuku Program, initiated by the government in 2005 to fight hunger, have also been advancing grants to farmer groups in different parts of the country (KEPCO 2010). Other institutions involved in extending credit to the agricultural sector are the cooperative societies and microfinance institutions. The total credit provided to agriculture on average is estimated at less than 10 percent of the total credit provided through the domestic financial system. Despite all efforts to reach smallholders, it is estimated that only one-third of total rural credit is allocated to smallholders, even though they produce more than 75 percent of the agricultural output and account for about 70 percent of marketed agricultural produce. The bulk of agricultural credit still goes to large-scale farmers (Ndung’u 2010), who can readily provide collateral and are well connected to the banking industry. II: Commercial lending to the agricultural sector The commercial banking sector is made up of 44 institutions (42 commercial banks and 2 mortgage finance companies). These institutions are 79.5 percent locally owned; the rest are foreign owned. In 2010, their total net assets were distributed as follows: local private institutions (54.7 percent), local public institutions (5.3 percent), and foreign institutions (40.0 percent). Market segmentation exists in the financial sector, with banks divided into large, medium, and small institutions. Despite a legal requirement for banks to dedicate 17–20 percent of their loan portfolios to the agricultural sector, the local banking system has remained conservative in lending to agriculture. The liberalization of interest rates has complicated the situation by making loans to agriculture more expensive as a result of perceived high risk associated with agriculture (KEPCO 2010). Table 11 shows that only about 5.3 percent and 5.6 percent of loans from the commercial banks went to agriculture in 2010 and 2011—far below what the government has mandated. Figure 25 44 indicates that the share of loans to agriculture by commercial banks has in fact been declining, indicating serious underfinancing of agriculture and a lack of commitment to comply with the government mandate. Table 11: Distribution of loans from commercial banks by sector, 2010–11 Sector 2011 June 2010 June Annual % Amount % of Amount % of change (Ksh total (Ksh total between 2011 billion) billion) and 2010 Personal/Household 296.00 27.3 235.50 28.4 26.7 Trade 198.50 18.3 151.30 18.3 31.2 Manufacturing 151.20 14.0 118.70 14.3 27.3 Real Estate 130.80 12.1 92.20 11.1 41.7 Transport and Communication 88.30 8.2 66.60 8.1 32.3 Agriculture 57.60 5.3 46.40 5.6 24.1 Financial Services 48.70 4.5 42.80 5.1 13.8 Building and Construction 33.00 3.0 22.70 2.7 45.4 Energy and Water 38.50 3.6 24.40 2.9 57.8 Tourism, Restaurants, and 24.40 2.3 18.70 2.3 30.5 Hotels Mining and Quarrying 16.10 1.4 9.60 1.2 67.7 Gross/Total 1,083.10 100.0 828.90 100.0 30.7 Source: Annual Report, Central Bank of Kenya, 2011. 45 Figure 25: Share of credit to the private sector (July 2011 to June 2012) Source: Central Bank of Kenya 2012. Figure 26: Agricultural loans as percentage of total loan disbursement by commercial banks Source: Central Bank of Kenya , 2012. 46 III: Performance of commercial bank loans by sector (2005–09) One reason that commercial banks usually cite for not providing credit to the agricultural sector is the high risk associated with agriculture, which is thought to result in high rates of default. Table 12 shows the distribution of nonperforming loans (NPLs) and NPLs as a percentage of outstanding loans by sector. As expected, the agricultural sector has the largest share of NPLs among outstanding loans, indicating the need for policy reforms that can lower the risk associated with the sector. As long as this condition persists, it will be difficult to convince commercial banks to increase loans to agriculture in line with government-mandated requirements. The lack of capital will continue to limit agricultural production and commercialization. Table 12: Nonperforming loans from commercial banks by sector, 2010–11 Sector Outstanding Nonperforming loans (NPLs) NPLs as % of loan (Ksh billion) outstanding portfolio, 2011 2010 loans in 2011 2011 (Ksh billion) Personal/Household 296.0 18.8 18.1 6.4 Trade 198.5 11.7 13.5 5.9 Manufacturing 151.2 7.0 7.0 4.6 Real Estate 130.8 6.7 7.0 5.1 Transport and Communication 88.3 3.7 3.7 4.2 Agriculture 57.6 4.9 5.5 8.5 Financial Services 48.7 1.6 2.2 3.3 Building and Construction 33.0 1.7 1.5 5.2 Energy and Water 38.5 0.2 0.3 0.5 Tourism, Restaurants, and 24.4 1.8 2.6 7.4 Hotels Mining and Quarrying 16.1 0.1 0.1 0.6 Total 1,083.1 58.2 61.5 5.4 Source: Central Bank of Kenya 47 Figure 27: Nonperforming loans (NPLs) for the different real sectors, 2011 Source: Annual Reports, Central Bank of Kenya, various years. Despite the relatively unfavorable impression given by the share of NPLs in the agricultural sector, it is worth noting that KCB, one of the major commercial agricultural lenders, performs much better than the average bank in extending agricultural credit as well as recovering agricultural debt. Figure 27 shows the distribution of loans to the various sectors by the KCB. In 2011 KCB’s lending to agriculture was 6 percent, compared to 4.9 percent for all commercial banks, and KCB reported that 3 percent of agricultural loans were nonperforming, compared to 8.5 percent for all commercial banks. These figures indicate that KCB may be better positioned than other commercial banks to deal with agricultural credit and loans. IV: Cost of and access to credit and financial services According to the Central Bank of Kenya’s Annual Report, the average lending rate to the private sector declined by 48 basis points in the fiscal year 2010/11, from 14.39 percent in June 2010 to 13.91 percent in June 2011. The decline in overall lending rate was reflected in all loan categories (overdraft, 1 –5 years, and over 5 years) in both corporate and business loans. The decline in interest rates was mainly attributed to a push by the Central Bank to have commercial banks lower their rates in the first nine months through March 2011. However, the lending rate over a five-year period for private sector loans increased marginally by 3 basis points, from 14.16 percent in July 2010 to 14.19 percent in June 2011. Although the average lending rate for private sector loans was about 14 percent, interviews with key stakeholders in the commercial banking industry showed that loans to the agricultural sector attracted higher interest rates of 20 –25 percent. This discriminatory higher interest rate, presumably resulting from a perception that agricultural loans 48 involve very high risks, could be responsible for the relatively higher NPL in agriculture compared to other sectors of the Kenyan economy. Figure 28: Distribution of loans from Kenya Commercial Bank by sector (2011) Source: Kenya Commercial Bank, personal communication, May 2011 Table 13 lists interest rates of financial products in Kenya between 2010 and 2011. The average deposit rate declined by 77 basis points; from 4.45 percent in June 2010 to 3.68 percent in June 2011. The deposit rates for all maturities declined. The decline in the deposits rate was more pronounced for deposits over three months, which declined by 120 basis points to 5.28 percent. The deposit rate on demand deposits declined from 0.97 percent in June 2010 to 0.87 percent in June 2011. The savings deposit rate also declined, falling from 1.75 percent in July 2010 to 1.37 percent in June 2011. 49 Table 13: Interest rates for financial products in Kenya (2010–11) 2010 2011 Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Average 14.39 14.29 14.18 13.98 13.85 13.95 13.87 14.03 13.92 13.92 13.92 13.88 13.91 lending rate Interbank rate 1.15 1.35 1.66 1.18 0.98 1.01 1.18 1.24 1.13 1.24 3.97 5.54 6.36 Average 4.45 3.85 3.74 3.53 3.58 3.54 3.59 3.43 3.41 3.47 3.47 3.51 3.58 deposit rate Savings 1.75 1.55 1.50 1.47 1.46 1.40 1.45 1.25 1.41 1.37 1.38 1.38 1.37 Interest rate 9.94 10.44 10.44 10.45 10.27 10.41 10.28 10.80 10.51 10.45 10.48 10.37 10.23 spread Source: Annual Reports, Central Bank of Kenya, 2010 and 2011. The decline in overall lending rate from June 2010 to June 2011 was much higher than the decline in the rate for overall deposits. Consequently, the interest rate spread increased from 9.94 percent in June 2010 to 10.23 in June 2011. Since September 2010, the interest rate spread declined from 10.45 percent to 10.23 percent in June 2011 due to the increase in deposit rates from 3.53 percent to 3.68 percent (CBK 2011). Poor access to credit, including limited physical access to bank branches, keeps investment in agriculture low, especially among smallholders, and has long been identified by the government as a crucial area where innovation is required. Rural dwellers (at 17.8 percent) have far more limited access to financial services than urban dwellers (at 40.3 percent); only 17.8 percent of women have access to back accounts, compared to 27.9 percent of men. More rural women (73 percent) are excluded from financial services than urban women (43 percent). The government’s efforts to improve this situation are starting to yield dividends. Numbers of rural and urban bank branches grew very significantly from 181 in 2005 to 436 in 2010 (Figure 25), following enactment of a policy for banks to improve accessibility in rural areas. Rural branches grew by 140 percent compared to 68 percent for urban branches (Ndung’u 2010). This growth has made Kenya one of the countries in sub-Saharan Africa with the highest access to formal financial services (Figure 29). Based on recent data, urban areas have about 6.6 branches per 100,000 people (15,151 urban dwellers per commercial bank branch). In contrast, rural areas have only 1.4 branches per 100, 000 people (72,290 people per branch), although these ratios are much higher than the norm for most countries in sub-Saharan Africa. 50 Figure 29: Growth in commercial bank branches, Kenya (2005–10) Source: Ndung’u 2010. Figure 30: Financial inclusion (% of adults) in Kenya in relation to other countries of sub-Saharan Africa Source: Amha and Peck 2010. 51 V: Warehouse receipt financing (WRF) system in Kenya Warehouse receipt financing (WRF) systems are prescribed as one way to facilitate access to credit, particularly among small-scale farmers in situations where credit bureau services are not well developed and do not cover most farmers, as in Kenya. WRF also benefits farmers by giving them an opportunity to sell to any participating institution in the WRF system. Farmers may also redeem receipts immediately through any of the participating banks or financial institutions traded at the commodity exchange. Traders and processors benefit from the convenience of bulking produce, standardizing quality and grading, and thus streamlining pricing and profit in ways that benefit grain buyers and sellers (CBK 2011). NCPB has one of the widest networks of warehouses throughout the country, with a capacity of over 1.5 million tons (Table 14, Figure 31). Other public institutions that have relevant food storage facilities include the Kenya Farmers Association, Kenya Tea Development Authority (KTDA), Kenya Planters Cooperative Union, and the Kenya National Trading Cooperation. The private sector also owns some warehouse facilities. These 1.9 million tons of storage space in addition to NCPB’s 1.5 million which can hold about 20 million 90-kilogram bags of grain (mainly maize), are spread across grain-surplus and grain-deficit regions. Although the infrastructure is available to implement WRF, it remains in the pipeline. One way that NCPB believes it can become more relevant to Kenya and more responsive to market dynamics and stakeholders’ needs is for Kenya to enact a WRF system that could provide collateral (and thus access to formal credit) for the majority of farmers. At the time of the interview (April/May 2012), Kenya lacked the legal and regulatory framework to establish a commodity exchange that would include a WRF system to govern grain trade and facilitate credit procurement by smallholders, among other functions. Table 14: Regional distribution of grain storage capacity Region Total capacity (t) Nairobi/Eastern 319,905 North Rift Valley 434,700 South Rift valley 513,000 Nyanza/Western 358,110 Coast 87,570 Northern 226,710 Total 1,939,995 Source: NCPB. 52 Figure 31: Typical NCPB warehouse in Kenya 11 Source: Adapted from NCPB’s presentation to the ABI team 2011. VI: Leasing arrangements and movable property as collateral Several laws and amendments regulate leasing and the use of movable property as collateral. These laws include the Chattels Transfer Act (Chapter 28, Laws of Kenya); Registration of Lands Act (Chapter 300, Laws of Kenya); Indian Transfer of Property Act–1882; and the Government Land Act (Chapter 280, Laws of Kenya). The various laws and amendments provide a lessee with the use of specified capital goods on a financial or operating lease or hire-purchase agreement basis, without collateral, for a specified period. In turn, the lessor collects a certain number of installment payments over the specified period. The financial lease arrangements were not found to be very popular in Kenya during the period of study. In contrast, operating leases were growing at a very fast rate owing to their tax benefits, although they were directed mostly at large or corporate firms with no visible use by SMEs and smallholders, who constitute more than 70 percent of the farming population (CBK 2011). It is projected that as the Credit Reference Bureau matures, the popularity of operating leases among SMEs and farmers will depend heavily on the availability of good credit information and the growth of secondary markets for equipment. In terms of access to agricultural land, in Kenya the most prevalent means of transferring land rights for agricultural purposes is through leasing. Many young people in Kenya today are unwilling to take to farming as a profession, and land is increasingly leased out, which is gradually leading to land consolidation in many communities in Kenya. This emerging scenario calls for a comprehensive land right and land use review to legitimize and institutionalize land transfers that legalize use rights, which will ensure and protect property rights. Such rights are usually necessary 53 for private ownership of the resources required for a competitive, efficient agricultural production system. When the interview for this study was conducted, the average rate of leasing one hectare of land was about Ksh 13,000, up from about Ksh 10,000 in 2010. These figures highlight the commercialization of this economic resource and the rising opportunity cost of land as population pressures continues to push people toward the marginal and semi-arid areas of the country. VII: Existence of collateral registry and credit reference bureau The sharing of credit information through credit reference bureaus (CRBs) was launched in July 2010 and is reported to be picking up steam gradually. The Central Bank of Kenya reported that as of June 30, 2011, credit reports requested by institutions had more than doubled to 728,553 from 284,722 reports in December 2010. The uptake of credit reports by banks is expected to increase as the use of credit referencing becomes entrenched and institutionalized in banks’ credit appraisal processes and procedures. The Central Bank of Kenya licensed Metropol Ltd. in April 2011 to operate as a credit reference bureau, making it the second bureau to open after CRB Africa, which was licensed in 2010. The agency banking model, which was launched in May 2010, has drawn interest from financial institutions. As of June 30, 2011, the Central Bank of Kenya had granted approval to six commercial banks to introduce an agent banking network. By September 2010, the Central Bank had approved about 5,892 agents; by 2011, 6,513. The introduction of agent banking is intended to enable institutions to provide banking services more cost effectively to customers. This initiative is expected to enhance financial access for those people who are currently unbanked or under- banked. Tables 15 and 16 show the depth of credit information and the effectiveness of collateral and bankruptcy laws in facilitating lending and credit procedures in Kenya, as reported by the World Bank’s Doing Business initiative. Table 15: Depth of credit information index (0–6) Measure Private Public Score credit credit bureau registry Are data on both firms and individuals distributed? Yes No 1 Are both positive and negative data distributed? No No 0 Does the registry distribute credit information from retailers, trade Yes No 1 creditors, or utility companies as well as financial institutions? Are more than 2 years of historical credit information distributed? No No 0 Is data on all loans below 1% of income per capita distributed? Yes No 1 Is it guaranteed by law that borrowers can inspect their data in the Yes No 1 largest credit registry? Score (yes to either public bureau or private registry) 4 Source: World Bank 2012. 54 Table 16: Effectiveness of collateral and bankruptcy laws in facilitating lending (0–10) Criterion Y/N Can any business use movable assets as collateral while keeping possession of the assets; and any Yes financial institution accept such assets as collateral? Does the law allow businesses to grant a non-possessory security right in a single category of Yes movable assets, without requiring a specific description of collateral? Does the law allow businesses to grant a non-possessory security right in substantially all of its Yes assets, without requiring a specific description of collateral? May a security right extend to future or after-acquired assets, and may it extend automatically to Yes the products, proceeds, or replacements of the original assets? Is a general description of debts and obligations permitted in collateral agreements; can all types Yes of debts and obligations be secured between parties; and can the collateral agreement include a maximum amount for which the assets are encumbered? Is a collateral registry in operation that is unified geographically and by asset type, with an Yes electronic database indexed by debtors’ names? Are secured creditors paid first (i.e., before general tax claims and employee claims) when a Yes debtor defaults outside an insolvency procedure? Are secured creditors paid first (i.e., before general tax claims and employee claims) when a Yes business is liquidated? Are secured creditors either not subject to an automatic stay or moratorium on enforcement Yes procedures when a debtor enters a court-supervised reorganization procedure, or the law provides secured creditors with grounds for relief from an automatic stay. Does the law allow parties to agree in a collateral agreement that the lender may enforce its Yes security right out of court, at the time a security interest is created? Score (number of yes responses) 10 Source: World Bank 2012. 3.2.2 Enabling Environment for Transport Table 17: Summary of indicators for roads and transport in Kenya Category Indicator Base year/period and value Transport costs Cost per kmt: Freights from primary to Ksh20.80(US$ 0.26) secondary market Freights from primary to to Ksh13.60(US$ 0.17) major cities>> Inland freights from Mombasa to Ksh12.57(US$ 0.15) major cities Freight in the international Ksh9.60(US$ 0.12) Northern Corridor (Mombasa to major cities) Overall freight average* within Ksh14.10(US$ 0.18)a the country 55 Cost of transporting a 20- Transport cost: Transport costs as a percentage of total ft container along the logistics cost: Northern Corridor from Mombasa–Nairobi (430 km): 14% Mombasa to international U$ 1,300 capitals/major cities Mombasa–Kampala (1,170 km): 23% US$ 3,400 Mombasa–Kigali (1,700 km): 34% U$ 6,500 Mombasa–Bujumbura (2,000 37% km): US$ 8,000 Mombasa–Goma (1,880 km): 37% US$ 9,500 Mombasa–Juba (1,750 km): 35% US$ 9,800 Average (1,488 km ): 35% US$ 6,417 Share of the components Sea freight shipping charges 8% of the cost of transport in Indirect (hidden) costs of delays 42% Kenya Port handing charges 1% Shipping line charges 9% Direct cost of delays 2% Clearing fees and VAT 3% Inland route costs 35% Corruption and bribery 2% of indirect hidden costs Competiveness of the Number of transport companies 70 transport companies with about 183 trucking Industry registered members. Presence of a truckers’ or transport Yes, there is the Kenya Transport association Association (KTA). It is estimated that only about 30% of truck owners belong to KTA. Membership involves a registration fee of Ksh 1,000 and an annual fee of Ksh 500 per truck for the first 50 trucks and a Ksh 5,000 flat fee for truckers owing more than 50 trucks. Opinion of traders and truckers on 2.5. Truckers in the transport business the competitiveness/degree of free complained about difficulties in entry and exit from the trucking registering trucks and the existence of industry for foodstuffs (Scale: 0–5; 0 cartels along the major popular routes. being a highly monopolized by few firms/individuals and 5 being very competitive and easy entry and exit) Degree of regulation by Government intervention in setting 4.5. The government does not regulate the government transport prices (Scale: 0–5; 0 if the transport prices, but difficulties in government totally controls the obtaining licenses and heavy taxes and market and 5 if the industry is tariffs on new trucks and spare parts 56 completely liberalized) constitute real bottlenecks for any efficient transport system that would attract many private investors. Average number of days required to 29 days. register a truck Transit fee 0.49% of total transport cost across the Kenyan border (Ksh 5,000–9,000 per truck, depending on border officers) Quality of roads Quality of trade- and transport- 2.16 out of 5, with an overall LPI of related infrastructure (e.g., ports, 2.43 railroads, roads, information technology)—Logistics Performance Index (LPI) Total road network in good 10% condition (%) (2010) Rural roads in good, fair, and poor Good: 5% condition (2010) Fair: 22% Poor: 72% Rural Access Index: Rural population 44% (1997) within 2 km of an access road (2010) 60% (2012) Overall freight average obtained using simple arithmetic means for freight along the three tiers of route. This section focuses on access to transport for leveraging agribusiness in Kenya. It examines the government’s overall policy of with regard to transport, the cost of transport and haulage of inputs and outputs to major distribution and marketing cities, and the degree and extent of regulation and/or deregulation of the trucking industry. It also examines the road network using the Rural Access Index (RAI) and Logistics Performance Index (LPI), which measure the overall quality of infrastructure of a specific country in relation to trade and doing business in general. I: Overview of Kenya’s road transport system and implications for agribusiness The Ministry of Roads, encompassing three main bodies—the Kenya National Highway Authority, Kenya Urban Roads Authority, and Kenya Rural Roads Authority—is responsible for the construction, rehabilitation, and maintenance of roads. Kenya has a road network of about 177,800 kilometers, of which only 63,575 kilometers is classified, leaving about 99,000 kilometers of unclassified roads. The classified road network has expanded from 41,800 kilometers at independence in 1963 to 63,575 kilometers in 2011, a rate of less than 500 kilometers per annum. During the same period, the paved road length grew from 1,811 kilometers to 9,273 kilometers. It is presently estimated that about 70 percent (44,100 kilometers) of the classified road network is in good condition and maintainable, while the remaining 30 percent (18,900 kilometers) requires rehabilitation or reconstruction. Annex 2 presents summary data on Kenya’s classified road network. International trunk (Class A) roads. Class A roads comprise international trunk roads linking centers of international importance and crossing international boundaries or terminating at international ports, such as Mombasa International Harbor. The seven defined international trunk roads comprise 3,755 kilometers, of which 57 2,886 kilometers are paved and 869 kilometers unpaved (Annex 3). These roads are all paved except for part of A2 north of Isiolo, part of A3 east of Garissa, and the A23 (engineered gravel). Among the Class A roads, the segment A109 and the northern segment of the A104, between Athi River and Malaba, deserve particular attention, because they are part of the Northern Corridor. Development of the Northern Corridor, conceived as a multi-modal corridor, is coordinated by a multinational secretariat based in Mombasa. This route is the busiest in the country, because it carries most of the export and import traffic through Mombasa to the interior of Kenya and to Uganda and other landlocked countries. The route is also a designated part of the Lagos – Mombasa long-distance highway (Link 8) under the Trans-Africa Highway Program. National trunk (Class B) roads. Class B roads are national trunk roads, originally defined as linking nationally important centers but more recently reinterpreted as linking provincial headquarters and other important centers to the capital, to each other, or to the international road network. The national trunk road network comprises 10 defined links (shown in Annex 4), totaling 2,799 kilometers, of which 1,339 kilometers are paved. Primary (Class C) roads. Class C primary roads were originally defined as linking provincially important centers to each other or to higher-class roads. More recently, these roads have been redefined as linking district headquarters to each other and higher-level roads or centers. Administrative responsibility and funding for the road network. The responsibility for road infrastructure (both classified and unclassified roads) is vested in the Ministry of Roads, established by the Kenya Roads Act 2007. The act provided for the establishment of three new road agencies: the Kenya National Highways Authority (responsible for Class A, B, and C roads); the Kenya Rural Roads Authority (responsible for Class D, E, and other roads); and the Kenya Urban Roads Authority (responsible for urban roads in the 47 Urban Areas in the country). The Kenya Roads Board finances road maintenance and undertakes technical audits. Funding for developing transport infrastructure comes mainly from the central government through tax revenues and borrowing from bilateral and multilateral lenders, as well as user charges. Current funding levels are inadequate to finance new infrastructure and maintain and rehabilitate existing infrastructure. The government intends to explore other sources for raising funds to develop and manage transport infrastructure, including funding from programs such as public ownership and private operation under Build Own Operate Transfer (BOOT) or its variants, joint ventures between the public and private sector, infrastructure bonds, debt financing, equity, licensing fees, development financing, and user charges (Ministry of Roads 2012). II: Regulations and government intervention in the transport (road) industry In Kenya, 96 percent of all passenger and other traffic moves through the road network; only about 4 percent moves by rail, air, sea, or lake. This fact underscores the importance of road transportation in Kenya, particularly for very bulky, heavy agricultural produce, which often has to be transported long distances to reach the final consumer or export port. About 20 key statutes and regulations govern the road transport system in Kenya today (GoK 2012), including the Transport Licensing Act (Chapter 404, Laws of Kenya); Kenya Road Boards Act (Chapter 408, Laws of Kenya); Road Maintenance Levy Fund Act No.9 of 1993 as amended in 1994; Public Roads Toll Act (Chapter 407, Laws of 58 Kenya); Finance 2005 Act; Public Roads and Roads of Access Act (Chapter 399, Laws of Kenya); Local Government Act (Chapter 265, Laws of Kenya); Kenya Roads Act No. 2 of 2007; Traffic Act (Chapter 403, Laws of Kenya); and a host of others. Despite these statutes and regulations, Kenya has no clear-cut policies on how best to regulate the transport sector. Very many issues are unresolved, and both tariff and nontariff barriers continue to hamper the free movement of people, goods, and services on Kenya’s highways and rural and urban roads. Tariff barriers hampering efficient transportation in Kenya include several port fees, licensing of transit cargoes, and payment for axle loads over the limit of 484 tons allowed on Kenyan roads, among others. Nontariff barriers, on the other hand, inhibit the free movement of freight traffic along the major transit corridors and thus raise overall transport costs. For example, cumbersome customs procedures lead to costly delays at the Port of Mombasa and various border points, which are reflected in the prices of goods (imports and exports). The delays are caused by long waiting times at weigh-bridges, police roadblocks, police escorts, and corruption, physical verification of transit cargo, and non-automation and non-application of other modern technology to facilitate documentation for logistics and clearance procedures (GoK 2012). Findings from the study, and interviews with key stakeholders in the road transport industry, including the Kenya Shippers Council and the Kenya Transport Association, revealed no government interventions to set prices in the road transport industry. Nor did the government own any transport fleets or companies during the time of study, although government parastatals like ADC provided skeletal transportation services for moving inputs and produce for farmers at rates lower than what the commercial private sector would charge. These services did not constitute any meaningful competition to private sector actors in the industry, however. There was evidence of price gouging and fixing among truck owners, despite the fact that there were about 70 transport companies and 183 registered members with the Kenya Transport Association during the study period. This situation may in part be responsible for the high cost of transport in Kenya, even though it has an extensive road network in fairly good condition. III: Transport costs in Kenya The cost of transport has long been established as a major component of the cost of doing business for manufacturers and industries, including agro-industries. Transport costs are important all along agricultural value chains. They are a key contributor to the competitiveness of firms involved in the upstream activities of production and the downstream activities of importing and exporting agricultural inputs and outputs. Improved logistics performance is therefore an important policy objective. Well-articulated logistics can indeed expedite growth in the agricultural sector, particularly in sub-Saharan Africa, where the cost of transport constitutes a very significant component of the total cost of doing business in agriculture. Logistics performance of customs, trade-related infrastructure, inland and transit logistics service provision, port (sea and air) efficiency, and utilization of information technology have all been identified by the World Bank as key components for reducing logistics costs and increasing the competitiveness of businesses over time. Empirical findings in Kenya have revealed that of all the means of transportation (road, rail, pipeline, and inland waterways), road transport costs are higher than freight costs by air or sea, as lengthy delays characterize the logistics chain. Of the total cost of importing goods (which covers moving goods from the point of loading to the 4 The axle limit for trucks on Kenyan roads is 40 tons, whereas Uganda and other neighboring East African countries allow trucks with axle limits of 50–56 tons on their roads. 59 end user), logistics costs account for 42 percent, whereas FOB accounts for 58 percent. Delays constitute a significant proportion (23 percent) of the import cost (FOB and inland logistics costs). Of the 42 percent logistics cost, delays account for 54 percent, with 18 percent going to taxes (Import Declaration Fee, VAT), while 0.2 percent is attributed to corruption (payment of bribes) (KSC 2012). Long delays in clearance and transportation are associated with hidden costs, including costs related to additional cargo dwell time or the opportunity costs of holding extra inventory in the form of raw materials or to regularize supply because the transport chain is not reliable. Because of the importance of and preference for road transportation compared to all other forms of transportation in Kenya, and to permit cross-country comparisons of transport costs among all of the countries in the ABI initiative, this study documents the cost of transportation via the three prevalent road classifications adopted by the Kenya Road Authority (Class A, B, and C roads). Studies show that the total logistic costs for moving a 20-foot container inland from Mombasa range from a minimum of US$ 9,174 for domestic transport from Mombasa to Nairobi to a maximum of US$ 28,309 for movement from Mombasa to Juba along the most popular international route in Kenya, the Northern Corridor (CPCS Transcom Limited 2010). Road transport costs are estimated to account for 14–37 percent of the logistics cost for importing goods (Table 18). The indirect5 and direct costs of delays along this Northern Corridor are by far greater than the cost of transportation, however. The logistics cost structure for the Northern Corridor is depicted in Figure 32. Figure 33 shows that transport costs are lowest along the international Northern Corridor and highest along the rural road segment. The rural roads are the most important segment for transporting and marketing agricultural produce and are crucial to attaining the government’s food security objectives. At the time of the survey, the average transport price along the International Northern Corridor (Mombasa – Nairobi, Mombasa–Kampala, and so on) was Ksh 9.6 (US$ 0.12) per tkm. The average transport cost for inland transportation from Nairobi to major cities in the country was Ksh 12.27 (US$ 0.15). Average prices for transporting inputs and outputs for various routes between one type of market and the other were also investigated. Results from the field showed that the price for transporting goods from the primary to the major cities was Ksh 13.6 (US$ 0.17), and the cost of transport from primary markets to secondary Ksh 20.8 (US$ 0.26), indicating the higher costs involved in transporting goods and inputs using rural routes rather than urban and international routes. 5 For details of how these costs are computed, see CPCS Transcom Limited (2010). 60 Table 18: Summary of road transport costs on Class A roads in Kenya (2012) Route Distance (km) Average vehicle Average road Road transport operating cost transport cost for cost as % of total per tkm (US$) 20-ft container logistics costs (US$) Mombasa–Nairobi 430 0.129 1,300 14% Mombasa–Kampala 1,170 0.145 3,400 23% Mombasa–Kigali 1,700 0.094 6,500 34% Mombasa– 2,000 0.090 8,000 37% Bujumbura Mombasa–Goma 1,880 0.094 9,500 37% Mombasa–Juba 1,750 0.149 9,800 35% Average 1,488 0.116 6,417 30% Source: CPCS Transcom Limited 2010. Figure 32: Northern Corridor logistics cost structure (%) Source: CPCS Limited, 2010. 61 Figure 33: Costs (Ksh and US$) of transport for different road networks in Kenya (2011) Source: Original Data from Field Survey, CPCS and Kenya Transport Association * Overall average obtained by simple arithmetic mean and not weighted average. While it is true that the government has made tremendous efforts in road construction and maintenance in the last decade, it is equally true that some roads, particularly rural roads, are still in very bad condition. Field surveys and interviews with stakeholders showed that rural roads were not only in very bad condition but that they deteriorated further in the rainy season in parts of Western Kenya and the Rift Valley Provinces—Kenya’s major food basket. IV: Rural Access Index and road quality in Kenya An adequate transport network, particularly in rural areas, is crucial for transforming subsistence agriculture to profitable commercial enterprise in Africa. The RAI measures the proportion of the rural population with adequate access to the transport system and has direct implications for agribusiness development. All things being equal, sub- Saharan African countries with a low RAI incur significantly higher production and marketing costs as result of high transport costs and spoilage (given that most agricultural produce is perishable). A good network of rural roads succeeds in leveraging agribusiness by facilitating the movement of agricultural produce from farms to collection centers before it is moved to secondary and tertiary or urban markets. Those roads are also crucial in the backward flow of agricultural inputs from the major distribution and marketing centers in cities. Using the most recent data, the Ministry of Roads developed a geographical information system to provide a comprehensive Road Inventory and Condition Survey for Kenya. The data show the road network to be 160,886 kilometers long, including 11,189 kilometers of paved road and 149,689 kilometers of unpaved road. 62 Since the present administration came into power, the road network for the classified roads has improved. Currently it is estimated that about 17 percent of classified roads are in good condition, 51 percent in fair condition, and 31 percent in poor condition (Kenya Road Board Authority 2010). In contrast, the majority of unclassified roads are in poor condition (72 percent), 22 percent are in fair condition, and only 5 percent in good condition (Table 19). A large portion of the unclassified road network is in either poor or failed condition and urgently requires rehabilitation if it is to be maintainable (Kenya Road Board 2010). Table 19: Summary of road conditions in Kenya (2010) Good Fair Poor Grand total Type of road Classified 10,651 31,847 19,438 61,936 Unclassified 5,440 22,165 71,345 98,950 Grand total 16,090 54,012 90,784 160,886 Condition of road Classified 17% 51% 31% 100% Unclassified 5% 22% 72% 100% All 10% 34% 56% 100% Source: Ministry of Roads, Kenya Roads Board, 2010. On average, it was estimated that in 2011/12 about 60 percent of rural people in Kenya lived within 2 kilometers of all-season roads or had access to roads at all times. When this figure is compared with the World Bank RAI of 44 percent (based on the 1997 survey), it appears that that the rural population living within 2 kilometers of access roads has risen by about 16 percentage points in the last 15 years. V: Doing Business in the road transport industry in Kenya Stakeholders interviewed for this study believed that the government is not directly engaged in the transport business and does not intervene in setting prices. They felt that no apparent government involvement affected their business. The transport industry for agricultural goods and products involves ownership of a truck(s) and licensing vehicles with the Transport Licensing Board, which discharges the provisions of the Transport Licensing Act (Chapter 404, Laws of Kenya). Most truck and fleet owners belong to the Kenya Transport Association, though this is not a requirement to operate a transport business. It is estimated that only about 30 percent of truck owners belong to the Kenya Transport Association. Membership involves a registration fee of Ksh 1,000 and an annual fee of Ksh 500 per truck for the first 50 trucks and a Ksh 5,000 flat fee for truckers owing more than 50 trucks. On average, truckers estimated that 29 days or a month were needed to register a truck. Key stakeholders regarded the main variables influencing the transport industry as the price of gas, tariffs and duties on trucks and spare parts, servicing of trucks, and road conditions (which determine the route to follow in the case of long-distance haulage). Competition from government-owned public transport companies was not regarded as a major variable. 63 According to the stakeholders, one major external barrier to doing business in the transport industry is the prohibitive customs tariffs and taxes on imported trucks and spare parts. Tariffs and taxes on imported trucks consist of import duty (25 percent of the CIF value of the vehicle); excise duty (20 percent of the combined CIF value and import duty); VAT (16 percent of the combined CIF value, import duty, and excise duty); Import Declaration Fee (2.25 percent of the CIF value or Ksh 5,000, whichever is higher). These taxes can easily add up to about 70 percent of the CIF price of the imported trucks and parts, depending on the model. Other external barriers that affect doing business in the transport industry revolve around institutional and regulatory issues. Specifically, automation of import/export documentation, introduction of standardized weighbridges within port zones, implementation of single-window documentation, and joint verification of trade documents by trade facilitation agencies are some areas where reforms could improve the efficiency of the transport system in Kenya and reduce delays and corruption in the transport industry. To improve inland systems, stakeholders generally agree on the reduction of weighbridges, adoption of weighing in motion, and reduction of police roadblocks (illegal ones outnumber the 26 officially recognized roadblocks) (KTA, personal communication, 2012). In addition, the transport authority in Kenya should build more storage facilities at weighbridge stations, enhance cargo security, and adopt one-stop border posts to expedite movement of goods across borders. Other steps that could improve transport efficiency in Kenya include the reduction of logistics costs through the harmonization of cross-border truck licenses to allow both north- and southbound cargoes along the Northern Corridor. Furthermore, comprehensive regulations governing transport service providers and preventing them from imposing illegal levies would enhance logistics and lower costs in the three tiers of road systems. Finally, stakeholders generally agreed that there is a need to reform the adjudication process for disputes at weighbridges/roadblocks by speeding up the related court processes and procedures. Such reforms would prevent the loss of business opportunities and unnecessary costs (which are usually passed on to producers and are quite significant, because agricultural produce is perishable and bulky). Key stakeholders in the road transport industry, including private transporters and trucking associations, were surveyed on government control and crowding out of the private sector in the industry. The resulting score for Kenya was 4.0 on a scale of 0–5 (0: government totally controls the market; 5: the market is completely liberalized and deregulated). In terms of free entry and exit into the transport market, the country scored an average of 2.5 on a 5-point scale. Respondents and key stakeholders complained of cartels along the major and profitable routes. Some truckers who have been much longer in the business said that prospective transporters would normally make some payments under the table to break into those cartels and operate a transport business. Table 20 presents the LPI for Kenya in 2012, as reported by the World Bank. The LPI is the weighted average of a country’s scores on six key dimensions of transport and customs clearance in the Doing Business indicators of that country. Given its LPI scores and infrastructure score (which includes the condition of the road network), Kenya ranks below the average for sub-Saharan Africa as a whole (2.16 for Kenya versus 2.29 for sub-Saharan Africa) and well below the top performer in Africa (South Africa, at 3.67). It is quite apparent that Kenya needs to improve its infrastructure, particularly its roads, to better facilitate the movement of goods and services and overall road transport services. 64 Table 20: Kenya’s Logistics Performance Index (LPI) Kenya Sub-Saharan Africa Top performer in the (score) region (South Africa) (score) Overall LPI Score 2.43 2.46 3.67 Rank 122 23 Customs Score 2.08 2.27 3.35 Rank 136 Infrastructure Score 2.16 2.29 3.79 Rank 130 International Score 2.69 2.47 3.50 shipments Rank 88 Logistics competence Score 2.38 2.43 3.56 Rank 118 Tracking and tracing Score 2.34 2.41 3.83 Rank 130 Timeliness Score 2.88 2.85 4.03 Rank 113 Source: World Bank Logistics Performance Index 2012. 65 3.3 Public and Trade Policies and the Role of Civil Society in Leveraging Agribusiness Table 21: Summary of indicators for public and trade policies and role of civil society in influencing agribusiness in Kenya Category Indicator Base year/period and value Policy measure Private sector perception of 3.0. The government is more involved agribusiness enabling environment in formulating polices and regulating (Scale 0–5: 0 if the policy environment the business environment but is hostile and crowds out the private sometimes intervenes, albeit sector and 5 otherwise) sporadically, in the importation and distribution of fertilizers and other inputs. Other than this, the government has embarked on the privatization and divesture of government corporations and firms that are in direct competition with the private sector. Policy consistency Five-point scale based on number, 3.5. The government is embarking on frequency, and magnitude of policy numerous policy changes to leverage changes. Private sector actors dislike agribusiness and attract foreign and frequent policy changes domestic investors in the agribusiness industry. Although most of these changes could be very helpful, they still make investors “nervous” and uncertain of the overall effect on their businesses. Agricultural trade policies The main trade policies that currently The national average for the influence producers’ share of FOB producers’ share of the FOB prices of Kenya’s main export Mombasa auction price was 86, commodity (tea), so producers’ share indicating that current government of the FOB price was used as a proxy policies as far as tea is concerned are to quantify the effect of government very favorable for tea producers. This policies result could reflect the fact that tea productivity in Kenya is among the highest in the world (about 300% higher than in China, for example). Percentage of total staple crop (wheat About 30 percent of the maize crop and maize) production passing passes through formal industrial through formal marketing channels processing to produce maize meal for ugali (the staple porridge consumed by the majority of Kenyans). Government fiscal policy The African-driven Comprehensive Average government expenditure of expenditure on Africa Agriculture Development allocated to the agricultural sector agriculture as a percentage Program (CAADP) framework from 2003 when CAADP was of total government stipulates that at least 10% of total inaugurated to 2011 was a mere 4.3%, 66 budget annual government well below CAADP’s 10% target. budget/expenditure should be Kenya lags very much behind its allocated to the agricultural sector neighbors, especially Ethiopia, which has consistently surpassed the 10% target since 2003. Agricultural expenditure as a Agricultural expenditure was 2.8% of percentage of AgGDP AgGDP (2006–11) and only 0.65% of GDP, despite the fact that the sector directly accounts for about 26% of GDP and indirectly accounts for another 25%. Private sector advocacy Ordinal scale based on efficacy and 3.5. Kenya has one of the most group for agribusiness and effectiveness in influencing organized apex organizations, the roundtables with civil government policies; 5 if very Kenya National Federation of society in a public-private influential and always influences Agricultural Producers (KNFAP), partnership forum government agricultural policies which brings together all other through roundtables organizations dealing with agribusiness. KNFAP is very effective in advocacy and in “forcing” government to organize roundtables and stakeholders’ meetings for policy changes and reforms. Although not all of stakeholders’ aspirations are reflected in policy, consultative forums and roundtables have become accepted in Kenya as the norm for effecting policy change and reform in agricultural matters. 3.3.1 Government Policies on Agribusiness I: Public policies and a new institution for promoting agribusiness As noted, the government launched its Strategy for Revitalizing Agriculture (SRA) in March 2004 with the intention of restoring the agricultural sector to its past glory during the first two decades after independence. In addition, the government launched the Agricultural Sector Development Strategy (ASDS) for 2010–20 to build on gains made through the SRA. In line with the ASDS, some policies and institutions in the agricultural sector are being reformed and restructured to become more relevant and to leverage agricultural growth through agribusiness development under the Kilimo Biashara campaign. In other words, policy and institutional reforms are accelerating to create opportunities for rural communities and the private sector to effectively promote agribusiness development in the country. This section highlights policy and institutional reforms that the government has pursued to promote agribusiness and enhance food security and poverty reduction in support of the SRA and ASDS. The bills and legislation listed in Annex 5 are examples of the numerous policy changes that the Ministry of Agriculture has initiated to address failed agricultural policies and turn a new page in the pursuit of private sector 67 development as a way to leverage agribusiness in the country. Under the new dispensation, roles have evolved to reflect an increased emphasis on the contribution of other actors, particularly the private sector, in providing inputs and services, while the government focuses on developing the strategic, legislative, and regulatory framework for an enabling environment for the production, distribution, and marketing of agricultural produce. Some government intervention occurs sporadically, but interventions have been quite limited in recent times compared to a decade ago. The important message here is that policy analysts, donors, and other funding agencies (including the World Bank) involved in agribusiness development in Kenya must monitor progress on legislation and its implementation and evaluate their impact on agribusiness development in the country. Until most of these policy changes are completed and institutionalized, the business environment will remain uncertain and perceived as risky by private investors. Interviewees gave the government a score of 3.5 on policy consistency. II: Private sector perception of agribusiness enabling environment The overall perception of major stakeholders is that there are long delays in the ratification and approval of the reform bills and legislation that should be in place for effective private sector development in agriculture. Table 21 clearly shows that the government and stakeholders take far too long to complete the necessary documentation and consultation. Even when bills have been passed and signed into law, implementation can be slow and incomplete. In other cases, the government’s back and forth positions and sporadic interventions (currently the case with the fertilizer industry) send mixed signals to private investors in regard to the liberalization and privatization of agricultural input and output markets. The frequent changes that the government is introducing to “improve” the enabling and business environment for private sector participation (though implementation is seen to be difficult) caused agribusiness stakeholders interviewed for this study to give the government a score of 3.0 for policy consistency. 3.3.2 Government Policies and Producers’ Share of FOB Price Tea is a very important cash crop in Kenya. Although tea accounts for only about 4 percent of GDP, it represents about 26 percent of total export earnings and thus is a leading cash crop that makes a significant contribution to the economy. Usually over 95 percent of the tea crop is exported annually,, mainly in bulk, earning over Ksh 97 billion in foreign exchange. As a rural enterprise, tea production contributes directly to the objectives of the ASDS, Kenya’s Vision 2030, National Development Plan, and Medium Term Plan 2008–12. An estimated 4 million Kenyans (about 10 percent of the population) derive their livelihoods from the tea industry. About 60 percent of tea farmers are small-scale producers, and about 50 percent of the workforce in tea enterprises is female, which contributes to gender empowerment. The crop also contributes significantly to the development of rural infrastructure and helps to stem rural–urban migration. Tea contributes to environmental conservation through reduced surface erosion, enhanced water infiltration, and mitigation of global warming through carbon sequestration (TRFK 2011). Any government agricultural and/or trade policies that adversely affect tea yields, production costs, processing, and marketing will have significant ramifications for the large number of people who derive their livelihoods directly or indirectly from this important cash crop. Given input costs and product prices, it makes sense to assume that farmers in Kenya should be earning sufficient income and thus a good share of the FOB price, as yields are much higher in Kenya than in other tea-producing countries (Figure 34). The high yields may be a result of government policies that have improved input use among smallholders and also transformed the tea subsector in recent times. 68 Figure 34: Tea productivity (kg/ha) in major tea-growing countries (2010) Source: TRFK 2011. This section uses the producers’ or farmers’ share of the FOB price of tea as an important indicator for the ext ent to which government policies help farmers meet their livelihood objectives, including household food security. All things equal, a very low share of the FOB price for producers would generally indicate “inefficient policies” that transfer incomes from farmers to the government and thus limit household income. A higher share of the FOB price for producers would imply that policies favor household earnings from tea and support the poverty reduction and food security agenda of the government and the Millennium Development Goals. The average producer’s share of the FOB auction price for tea was about 86 percent, implying that farmers in Kenya receive on average 86 percent of the total FOB price of tea at the Mombasa auction sales (Figure 35). This share seems very reasonable and compares very favorably with values of 90 percent received by Kenyan farmers for both tea and coffee in the 1980s and 1990s (Harmza and Azanaw 1995) and much higher than the 46 –60 percent received by Ethiopian coffee farmers. This relatively high share could also explain why tea production has been on the rise in the country since the inception of agricultural reforms that have tended to eliminate much government intervention in the agricultural sector. 69 Figure 35: Producers’ price and FOB/auction price ($/t) of tea in Kenya (2007–11) Source: CPDA (Christian Partners Development Agency). 2008. Report on Small-Scale Tea Sector in Kenya. Nairobi. Figure 36: Producers’ share of the FOB price of tea in Kenya (2007–11) 90 88.2 88 Producers' share of FOB price (%) 86.5 86.8 86 86.1 86 84 82 81.2 Share of the FOB price (%) 80 78 76 2007 2008 2009 2010 2011 2007-11 Year Source: Adapted from TRFK 2011; International Tea Committee 2010. 70 3.3.3 Government Budget Allocation and Expenditures on Agriculture At the Second Ordinary Assembly of the African Union in July 2003 in Maputo, African Heads of State and Government endorsed the Maputo Declaration on Agriculture and Food Security in Africa (Assembly/AU/Decl. 7(II)). The Declaration contained several important decisions regarding agriculture. Prominent among them was the “commitment to the allocation of at least 10 percent of national budgetary resources to agriculture and rural development policy implementation within five years.” This commitment recognizes the decisive role of the agricultural sector in helping the Member States to reach the Millennium Development Goals of reducing hunger and poverty by half by 2015 through the pursuit of 6 percent average annual growth in the agricultural sector. Since the Maputo Declaration, the share of national budgets allocated to agriculture has been regarded as a proxy for governments’ commitments to promote investment in agriculture and a positive policy action to reduce hunger and food insecurity by leveraging agribusiness development. Consequently, under CAADP—the main framework for accelerating agricultural development in Africa—member countries are mandated to allocate at least 10 percent of their annual budget to agriculture. Being a Member State of the African Union, Kenya is a signatory to the Maputo Declaration. In accord with the CAADP agenda, Kenya raised its budgetary allocation to the agricultural sector from 1.6 percent in 2003 to 3.8 percent in 2007/08. At the end of the first five-year CAADP implementation period, however, Kenya had not reached the target of 10 percent and could technically be said not to have honored the provisions of the Maputo Declaration. Figure 37 shows the Government of Kenya’s budget allocation to the agricultural sector. The allocation to the Ministry of Agriculture has been increasing in nominal terms (from Ksh 17,963 million in the 2006/07 production year to Ksh 35,973million in 2010/11). As the figure shows, however, the government’s allocation to agriculture has been fluctuating and indeed decreasing relative to the overall budget for the entire economy. The government has yet to meet the CAADP target in any given year, despite the fact that it has conducted CAADP roundtables and signed the compact. In addition, expenditure on agriculture as a percentage of GDP between 2006 and 2011 averaged only 0.65 percent. To put this number in perspective, it is important to recall that agriculture accounts directly for about 26 percent of GDP and indirectly for another 25 percent through backward and forward linkages with manufacturing, distribution, and services industries, among others (GoK 2010). Low investment in agriculture, if not addressed, may jeopardize the remarkable progress the country has made in the last few years. It may slow implementation of the investment proposals specified in the CAADP compact, which are necessary to achieve the 6 percent target growth rate in the sector set by CAADP framework. 71 Figure 37: Agricultural expenditure as a share of government expenditure (1995–11) Source: MOA, Annual Report, various Issues Further analysis shows that much of the money allocated to the Ministry of the Agriculture was expended on recurrent rather than on capital expenditures (Figure 38, Figure 39, and Table 22). In other words, the “meager” government allocation to the sector is not used for investment and in building capital stock to generate greater output and production in the sector but rather on salaries and meeting other current expenditures. It seems that the Ministry of Agriculture hopes to spend more on capital than on recurrent expenditures in 2010/11, unlike previous years. 72 Figure 38: Budget utilization trends (2006/07–2010/11) Source: MOA, Annual Report, Various Issues Figure 39: Composition of public expenditures on agriculture in Kenya (2006–10) Source: Annual Report; Economic Review of Agriculture, MOA- Various Issues 73 Table 22: Expenditure for the Ministry of Agriculture (Ksh million) (2006/07–2010/11) 2006/07 2007/08 2008/09 2009/10 2010/11 Budgete Actual Budgete Actual Budgete Actual Budgete Actual Budgete d d d d d Recurrent 5,658.40 5,464.50 9,598.30 9,500.90 7,805.20 7,530.00 7,799.00 7,911.00 6,427.00 budget Development 3,651.00 4,478.00 4,156.00 4,022.00 5,289.00 5,608.00 5,673.00 4,788.00 12,091.00 expenditure Total 9,310.00 9,942.00 13,754 13,523 13,094 13,138 13,472 12,699 18,518 expenditure Total 0.73 0.56 0.75 0.74 0.63 0.63 0.59 0.56 0.74 expenditure as % of GDP Total 1.83 1.96 2.08 2.04 1.95 1.96 1.52 1.44 1.52 expenditure as % of total government expenditure Capital 38.0 36.0 43.0 29.8 40.0 42.7 42.1 37.7 65.5 expenditure as % of total expenditure Recurrent 62.0 64.0 57.0 70.2 60.0 57.3 57.9 62.3 34.5 expenditure as % of total expenditure Budget to 17,963.50 16,921.20 24,506.00 22,388.10 21,933.40 21,440.80 26,194.90 24,736.00 35,973.0 agricultural sector Agriculture as 3.5 3.3 3.7 3.4 3.3 3.2 3.0 2.8 4.4 % of total budget Source: Economic Review of Agriculture, MOA-Various issues 3.3.4 Role of Civil Society, Advocacy Groups, and Roundtables in Influencing Agricultural Policy The success of any agricultural strategy (indeed, any economic strategy) adopted by a country depends largely on its policy processes and structures, in conjunction with the actors involved in formulating the policies. Experts believe that the government alone cannot resolve a country’s social and economic problems. The general consensus is that civil society and advocacy groups that cut across gender, regional, ideological, political, and professional lines can bring pressure to bear upon the government and policy makers to initiate and implement economic reforms. Based on an objective evaluation of the causes of economic problems, concerted efforts are needed through dialogue and 74 roundtables to develop well-thought-out policies and strategies to address them. In this way, civil society and advocacy groups can act as a key force for economic development and growth within a country. It has been suggested that policy making in the agricultural sector in Kenya has followed the country’s historical development. Around independence, policy shaping the environment for agriculture has been described as not being pro-poor and determined largely by the political elite. Policy formulation tended to be biased in favor of particular ethnic groups while penalizing others (Alila, and Atieno, 2006). Such policy formulation processes purposely created economic rents and patronage for government political affiliates by applying licensing and restrictions to various stages in the production and marketing chains, which created artificial shortages benefiting the political class and their cronies. In the post-independence era, agricultural policy was dominated by the political economy of the agricultural sector, which was largely defined and characterized by donor assistance priorities. Agricultural policy was driven mainly by strategies designed to satisfy the aspirations of those who provided the funding, to the detriment of large segments of the pro-poor population who had no contribution to formulating policies for a sector that was central to their livelihoods. This phase of policy formulation peaked with the World Bank’s Structural Adjustment Program of the 1970s, which dismantled or stunted most agricultural institutions and left a huge gap in the input supply and marketing systems. The aftermath of structural adjustment became a defining moment for most African countries, including Kenya, which turned toward alternative ways of formulating policy that would be more coherent, broad based, and inclusive. Today, agricultural policy making in Kenya can be described as a holistic, participatory process bringing many stakeholders into a national discourse, dialogue, and consultation with ministries and institutions in the country (Annex 5). The process used in formulating the SRA is an example. This 10-year agricultural policy framework, which has so far been judged to be successful, relied on three-year rolling plans that reflect input from a yearly national forum of stakeholders in the agricultural sector, including the Kenya National Federation of Agricultural Producers (KNFAP), the private sector, research institutes, academicians, the international community, and donor agencies. This forum is usually organized and led by the ministries in a collegial atmosphere that brings all the stakeholders together for a brainstorming exercise in a roundtable that takes into consideration the interests of the majority of the stakeholders. The role of advocacy groups is pronounced and very welcome in policy formulation in Kenya. Groups such as KNFAP, Kenya Shippers Council, Kenya Transport Association, and a host of others acknowledged participation in one or more forums to formulate policy, reforms, frameworks, and strategies to enhance efficiency and increase productivity along the value chains of most agricultural commodities. KNFAP, an apex national organization belonging to the International Federation of Agricultural Producers and East African Farmers Federation, is one of the most influential advocacy groups. KNFAP comprises all agricultural producer organizations, farmer groups (including the Kenya Farmers Association), and women’s and youth organizations. It is a very strong voice in policy formulation, particularly in the area of pricing and marketing of agricultural produce. Interviews with key stakeholders ranked KNFAP as one of the advocacy groups that is usually consulted with regard to policies that would affect any segment of producers, marketing agents, and retailers in the agricultural sector. Although interviewees acknowledged strong participation in roundtables and forums for policy formulation and reforms, they also contended that their opinions and views were not always reflected in the final policy and legal 75 documents. Above all, they noted that policies could be implemented in ways that differed from the consensus reached by stakeholders. All in all, however, the policy formulation processes and environment have changed for the better over time in Kenya. Both advocacy and stakeholders’ participation in policy making have been greatly enhanced. Signs of emerging strength include the increasing transparency, dialogue, and discourse surrounding policy formulation and stakeholders’ stronger and clear voice in leveraging private sector participation and increasing competition in the agribusiness sector. Stakeholders interviewed for this study gave an overall average score of 3.5 for the inclusiveness of policy formulation and reform and the government’s willingness to engage and use stakeholders’ opinions in those processes. 4. Concluding Remarks This study has focused on factors that are likely to promote successful agribusiness development in Kenya. Based on these factors, it has developed a series of agribusiness indicators that can be used to benchmark, monitor progress, and draw comparisons across a selection of sub-Saharan African countries. Such empirical cross-country comparisons have been instrumental in “nudging” governments toward policy reforms and in providing advocates of such reforms with political traction. Findings for the seed industry reveal the emergence of a strong private sector that is growing at a very fast rate. Although the parastatal KSC continues to dominate the seed market, particularly with regard to sales of hybrid maize seed (accounting for about 90 percent of all hybrid maize seed sold in the country), private companies have been growing in number and account in part for the widespread adoption and use of hybrid maize seed in Kenya. On average, most farmers in Kenya use new hybrid seed; only about 25 percent of the land is planted to retained hybrid seed. Based on a weighted average of all adopters by agro-ecological zone, it is estimated that the adoption of hybrid maize seed is about 82 percent, one of the highest in sub-Saharan Africa. Overall, about 70 percent of the maize area and 54 percent of the wheat area are planted to certified and improved seed. Kenya’s accomplishments in the utilization of certified seed have been feasible, in part, because the country participates in OECD and ISTA seed certification systems. This participation enables Kenya to engage in trade for certified and improved seed with other member countries and close the seed supply gap when domestic supply is inadequate. In addition to belonging to international seed associations, Kenya has partnered with international development agencies such as CNFA and AGRA to create a network of agro-dealers. The network has reduced the cost of obtaining seed by reducing the distance that farmers must travel to the nearest agro-dealer in rural areas where the cost of transportation is highest. Together, increased private sector participation, public-private partnerships for training and capacity development, and increased trade have all helped Kenya to increase the adoption of certified seed in a relatively short period. Kenyan policies that influence seed to grain price ratios have followed a favorable path for the development of a viable seed industry, ranging from under 5 to slightly above 10 over the past decades. One area of concern in the seed market, however, is the lengthy varietal trials required for imported seed and the associated fees, which many stakeholders found expensive, particularly for smaller seed companies operating in the country. 76 When it comes to fertilizer, Kenya stands out as one of the few African countries that have increased fertilizer application rates in a sustained manner in the last two decades. The government liberalization policy of the 1990s, which eliminated price controls and import licensing, among others controls, created a favorable investment climate that attracted private firms and individuals into the fertilizer market. This action, together with the robust network of agro-dealers, simulated fertilizer consumption. Rates of application in parts of Kenya, especially the high- potential areas of Western Kenya, approach rates used by farmers in Asia and Latin America. Kenya’s successful experience with fertilizer liberation and private sector development has been cited as a classical example of how policy reforms that promote public-private partnership can effectively transform an inefficient sector, fraught with corruption and wastage, into a much more efficient one. One drawback, however, is that fertilizer still arrives very late in the cropping season, and late application can reduce the benefits of fertilizer use. Imports are zero rated, but surcharges such as port and handling fees and inland transport costs still make fertilizer expensive and beyond the reach of some smallholders. The government delivers some fertilizer at subsidized prices to very poor subsistence farmers, but this program has generated considerable debate in the fertilizer industry and must be monitored carefully to ensure that Kenya does not reverse the important progress it has made in marketing and distributing this vital input. One interesting finding from the Kenya study is that smallholders, particularly in the high-potential areas of Western Kenya and the Rift Valley, have come to appreciate the importance of tractors and tractor-drawn implements for efficient and timely farm operations. The resulting high demand for tractor-based farm operations has been confounded by the limited supply of equipment (a problem common across Africa). Tractor-hiring services for plowing and harrowing, especially at times of peak demand, are very expensive and inefficient for timely operations. As with imports of all other farm inputs, tractor imports are zero rated, but the importation of tractor spare parts is subject to a duty of about 16 percent. This expense, coupled with the high demand for the few tractors in the country and inadequate after sales services and maintenance, make the economic lifespan of tractors much shorter than what is technically feasible. At any point in time, about half of the tractors in Kenya are out of commission. The provision of loans to the agricultural sector in Kenya is dominated by AFC, the parastatal agricultural bank established in 1969 solely to develop agriculture. More than 85 percent of AFC’s branches are in rural areas, ma king AFC quite instrumental in extending credit to smallholders who otherwise would have no access to formal credit services. Although the government has mandated commercial banks to ensure that between 17 percent and 20 percent of their loans go to the agricultural sector, commercial lending to agriculture remains very low and nowhere near the government-mandated level. Lending to the agricultural sector has hovered around 5 percent in the past decade. Progress has been made in increasing the number of commercial bank branches in rural Kenya, but the physical distance of these branches from some agricultural communities remains an impediment to serving them well. Rural dwellers have much more limited access to banking facilities than urban dwellers (17.8 percent for rural dwellers versus 40.3 for urban dwellers). In Kenya, only about 17.8 percent of women have access to a bank, compared to 27.9 percent of men. Rural women are much more likely to be excluded from banking (their exclusion rate is 73 percent) compared to an urban woman (whose exclusion rate is 43 percent). 77 Among the commercial banks surveyed, KCB appears to be in the best position to deal with and provide agricultural credit to farmers. KCB dedicates an average 6 percent of its loan portfolio to the agricultural sector (the comparable figure for all commercial banks is 4.9 percent) and has an NPL rate of 3 percent (compared to 8.5 percent for all commercial banks). It is reasonable to suggest that any program designed to improve agricultural lending by commercial banks in Kenya should be anchored at KCB. The recent liberalization of interest rates seems not to have favored the agricultural sector. The average rate for private sector loans was about 14 percent, but interviews with key stakeholders in the commercial bank industry indicated that loans to the agricultural sector attracted higher interest rates of 20 –25 percent. These discriminatory higher interest rates were attributed to the perceived higher risks and higher default rates associated with the sector. One surprising finding is that Kenya has yet to benefit from a working warehouse receipt system, even though it has one of Africa’s most extensive warehouse networks, capable of storing about 20.4 million 90-kilogram bags of grain at sites throughout the country. On the other hand, Kenya has succeeded in establishing credit reference bureaus that are gaining momentum and popularity. It is hoped that in the not-too-distant future, banks will increase their use of credit reports as credit referencing becomes institutionalized in credit appraisal processes and procedures. Road transport is the most popular but also most expensive mode of transportation in Kenya, accounting for more than 96 percent of the total passenger and freight traffic. For this reason, policy makers should see road improvement and rehabilitation as vital to the government’s efforts to ensure that agribusiness can yield substantial dividends. Transport costs were found to be very significant. The direct, indirect, and hidden costs of transport account for about 58 percent of the logistic costs of moving imports from the Port of Mombasa to the hinterland. The average tariff cost for transporting goods along the three tiers of Kenya’s road system was most expensive on the rural (primary) route from the first agricultural product assembling point to the primary market. This finding reflects the poor condition of rural roads. Although the government has made giant strides in road construction and rehabilitation, most of its projects relate to urban highways, especially international trunk and national roads. Based on the overall LPI of Kenya for 2012, Kenya scored 2.43 on a scale of 5, below the average for sub-Saharan Africa (2.46) and below South Africa (3.67), the top performer in Africa. Given its LPI scores and infrastructure score (which includes the condition of the road network), Kenya ranks below the average for sub-Saharan Africa as a whole (2.16 for Kenya versus 2.29 for sub-Saharan Africa) and well below the top performer in Africa (South Africa, at 3.67). This scoring is indicative of the urgent need to repair and rehabilitate roads, particularly in rural areas where most farming activities originate. Recent mapping by the Kenya Roads Board classified 5 percent of rural roads as being in good condition, 22 percent as fair, and 72 percent as poor. Yet all in all, progress has been made in improving access to roads in the rural sector. Official estimates for the RAI have increased from 44 percent in 1997 to about 60 percent in 2012. Since launching its Kilimo Biashara (agribusiness) campaign, the government has introduced many institutions and reforms in line with its 2010–20 strategy for the agricultural sector (ASDS). The ASDS focuses on the role of agribusiness in transforming agriculture from a mainly subsistence to a commercial enterprise, especially among smallholders, as a way to improve food security and reduce poverty. Often these policy changes and institutional reforms are not ratified and passed into law in a reasonable amount of time. These delays sometimes create confusion in the minds of entrepreneurs about current business procedures and processes. The effect among others is that price volatility and uncertainty surround those commodities and inputs targeted by changes in laws and 78 policies that are proposed but not yet implemented. Thus the same problems that the government wanted to ameliorate get accentuated. The indicators for government expenditure on agricultures draw considerable attention, given the government’s commitment to leveraging agribusiness. Public expenditure on agriculture is very negligible (about 5 percent), far below what has been mandated by the African Heads of State and Government in the Maputo Declaration (10 percent), to which the Government of Kenya is a signatory. What is more disturbing is that Kenya has signed the CAADP compact, which lists the investment proposals to be implemented to achieve the 6 percent growth rate in the sector necessary to transform agriculture. In advocacy, Kenya has made tremendous progress. It seems to have learned from the post-independence era, when agricultural policy was dominated by the political economy of the sector, which was largely defined by donor assistance priorities and the interests of political elites and cronies of the government at the state level. More recently, of necessity the government has adopted a holistic, all-inclusive participatory approach to policy reform and change that includes the majority of stakeholders. Advocacy groups interviewed during the study, including KNFAP, the Kenya Shippers Council, the Kenya Transport Association, the private sector, research institutes, academicians, and the international community and donor agencies, confirmed that they have participated at one time or another in roundtables and forums where important policy matters concerning the private and public sectors are discussed and negotiated. 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Independent Evaluation Group (IEG), The World Bank, Washington DC; 90p 82 Annex 1: Cost Components of Imported Fertilizers in Kenya Table A1.1: Cost components of DAP and urea imported into Kenya (at 2011 current prices) Seria Cost element DAP ex-Tampa Urea ex-Arab Gulf l No. US$/t Ksh/50- US$/t Ksh/50- kg bag kg bag 1 Forex rate 90.0 90.0 2 Free on board (FOB) bulk 600.0 2,699.0 505.0 2,271.6 3 Ocean freight 70.0 314.9 50.0 224.9 4 Cost and freight (C&F) 670.0 3,013.8 555.0 2,496.5 5 Marine insurance, 1% of C&F 6.7 30.1 5.6 25.0 6 Cost, insurance, and freight (CIF) 676.7 3,044.0 560.6 2,521.5 7 Import Declaration Fee (IDF), 2.25% of CIF 15.2 68.5 12.6 56.7 8 Finance cost 70% C&F at 24%/yr for 3 months 28.1 126.6 23.3 104.9 9 Letter of Credit (LC) commission / other bank charges, 2% C&F 13.4 60.3 11.1 49.9 10 KBS radiation levy, Ksh 10.04/t 0.1 0.5 0.1 0.5 11 Port charges, Kenya Port Authority (KPA), US$ 5 5.0 22.5 5.0 22.5 12 Stevedoring (KPA), US$ 8 8.0 36.0 8.0 36.0 13 Woven Polypropylene bag with liner, US$ 6.2 6.2 27.9 6.2 27.9 14 Bagging and other costs, US$ 4 4.0 18.0 4.0 18.0 15 Inspection and tally, US$ 2 2.0 9.0 2.0 9.0 16 Spillage and losses, 0.5% of C&F 3.4 15.1 2.8 12.5 17 Clearing and forwarding, Ksh 120/t 1.3 6.0 1.3 6.0 18 Transport to warehouse in Mombasa, Ksh 400/t 4.4 20.0 4.4 20.0 19 Handling at warehouse, Ksh 200/t 2.2 8.9 2.2 8.9 20 VAT 16% shore handling 11–19 except 16 5.3 23.9 5.3 23.9 21 Landed warehouse Mombasa 775.4 3,448.1 649.0 2,881.8 22 Loading at warehouse, Ksh 150/t 1.7 7.8 1.7 7.8 23 Road freight to Nairobi, Ksh 3,500/t 38.9 175.0 38.9 175.0 24 VAT 16% on 22–23 9.2 41.2 9.2 41.2 25 Landed cost, Nairobi 825.2 3,672.1 698.7 3,105.8 26 Markup (2%) 16.5 74.2 14.0 62.9 27 Wholesale Nairobi prices 841.7 3,746.3 712.7 3,168.6 28 Transport Kitale, Ksh 4,000/t 44.46 200 44.46 200.00 29 Landed cost Kitale 886.1 3,946.3 757.1 3,368.6 Source: FOB prices and ocean freight derived from FERTECON Phosphate and Nitrogen Reports of November 24, 2011. Other costs per discussion with KPA, importers, banks, and clearing and forwarding and transport contractors. Note: Exchange rate Ksh 89.9656 = US $1. 83 Annex 2: Road Classification Network of Kenya Table A2.1: Extent and classes of roads in Kenya Road class Premix Length by surface type (km) Total Surface Gravel Earth dressing International trunk roads (A) 1,244.91 1,563.81 715.11 94.48 3,618.31 National roads (B) 350.21 1,166.26 819.29 346.14 2,681.90 Primary roads (C) 642.89 2,198.16 3,601.64 1,552.90 7,995.59 Secondary roads (D) 76.63 1,183.10 5,701.93 4,087.73 11,049.39 Minor roads (E) 165.81 542.04 8,215.89 17,982.57 26,906.31 Special purpose roads 24.88 114.63 4,929.69 6,253.78 11,322.98 All classes 2,505.33 6,768 23,983.55 30,317.60 63,574.4 Source: Ministry of Roads and Transport, Nairobi, 2012. Annex 3: International Trunk Roads Table A3.1: Kenya’s international trunk roads (Class A) Road Link and distance (km) Distance (km) A1 Tanzania border (Isebania)–Kisumu–Kitale–Sudan Border (Lokichoggio) 886 A2 Nairobi–Thika–Isiolo–Moyale (Ethiopia border) 833 A3 Thika–Garissa–Somalia border (Liboi) 556 A104 Uganda border (Malaba)–Nakuru–Nairobi–Athi River–Tanzania border 648 (Namanga) A109 Athi River–Mombasa 473 A14 Mombasa–Tanzania border (Lunga Lunga) 106 A23 Voi–Tanzania border (Taveta) 114 Source: Ministry of Roads and Transport, Nairobi Kenya 2012. Annex 4: National Trunk Roads Table A4.1: Kenya’s national trunk roads (Class B) Road Link Distance (km) B1 Kericho/Mau Summit (A104)–Kisumu–Busia (Uganda border) 229 B2 A104–Kitale (A1) 54 B3 Mai Mahiu (A104)–Narok–Sotik–Kisii (A1) 280 B4 Nakuru (A104)–Marigat–Loruk (A1) 227 B5 Nakuru (A104)–Nyahururu–Nyeri (A2) 183 B6 Makutano (A2)–Embu–Meru (A2) 169 B7 Embu–Kitui–Kibwezi (A109) 279 84 B8 Mombasa–Garissa (A3) 453 B9 Isiolo (A2)–Mandera 744 B10 Jomo Kenyatta International Airport Spur 4 Source: Ministry of Roads and Transport, Nairobi, 2012. Annex 5: Status of Selected Ministry of Agriculture/Sector Policy Reforms (2011) Table A5.1: Ministry of Agriculture and agricultural sector policy reforms and status (2011) No Subsector Organizatio Type of policy Stage of processing Status of the policy . n document, reform Bill, or Cabinet Memo 1 Seed KEPHIS National Seed Policy Paper approved Preparation for industry Policy by Cabinet on launching and September 11, 2008. implementation in 2011/12. Seed and Plant Approved by Cabinet on Awaiting harmonization Varieties September 11. of concerns raised by the Amendment AG on clauses that will Bill impact on KEPHIS Bill, on 3 areas of Plant Genetic Resources, Penalties, and alignment with the UPOV Convention of 1991. 2 Extension National Policy approved by Policy awaits Agriculture Cabinet. publications and tabling Sector in Parliament with Extension ASCU for preparation of Policy Sessional paper. 3 Food National Food Joint Cabinet Memo and Memo deferred for security and and Nutritional Policy was forwarded to mainstreaming New safety Policy the Cabinet Office for Constitution. consideration in September 2009. National Bill has been reviewed to Bill awaiting feedback Cereals and address outstanding from NCPB. Produce Board issues on grain Amendment- development levy and Bill 2007 increase of strategic grain levels from 6 million to 8 million bags. 85 4 Soil fertility KEHPIS Soil Fertility Policy on Soil Fertility Awaiting finalization of and Policy and Bill, 2006 was ready the Animal Feedstuffs fertilizers on March 2006. Bill and Policy by the Ministry of Livestock Development. Fertilizer and This bill is ready for Soil deliberations and Conditioners ratifications. Bill 5 Horticultur Horticultural National The draft Policy is being Regional stakeholder e Crops Horticultural reviewed by ASCU, consultations have been Developmen Development Fresh Produce Exporters conducted; awaiting a t Authority Policy Association of Kenya, national stakeholders’ (HCDA) KEPHIS, Kenya Flower forum. Council, Directorate of crops, HCDA, and Policy Directorate. 6 Commodity KEPHIS KEPHIS Bill KEPHIS draft Bill is Bill with the AG as and input complete and has been harmonization is done. regulation approved by Cabinet. 7 Emerging National Draft Policy has been Awaiting incorporation crops Emerging presented and debated of stakeholders’ views. Crops Policy by stakeholders. Stakeholders forum held on 10th June, 2010. 8 Urban and National Urban Stakeholders’ views have Awaiting incorporation peri-urban and Peri-Urban been collected. of stakeholders’ views. agriculture Agriculture and Stakeholders’ forum held and Livestock on 9th June. Work in livestock Policy progress. 9 Extension Agricultural Draft Bill ready and Consultations with regulation Professionals, submitted to AG for Cabinet Office. Registration clearance in 2008; and Licensing Cabinet Memo with the Bill Minister for Livestock for signature. 10 Agriculture ASCU Consolidated Draft Bill formulated Consultants sector Agriculture and given to ASCU for incorporating legislation Sector Reform progressing in October stakeholders’ views, Bill 2008. Work in progress. 11 Agricultural AFC Agricultural Draft Amendment Bill Cabinet Memo and Bill finance Finance and memorandum of prepared and forwarded Corporation Reasons from AFC to the AG. Amendment ready. Bill, 2009 86 12 Agribusines ASCU National First Draft Policy Ready. Awaiting completion by s Agribusiness the technical team and Policy ASCU; work in progress. 13 Root and National Root Draft Policy ready. National Stakeholders’ tuber crops and Tuber forum held on August policy Policy 25, 2010; Bill awaiting input of stakeholders’ views. 14 Tea KTDA Tea Draft Bill and Cabinet The Bill has been passed Amendment memorandum have been by government. Bill 2009 prepared. Source: MoA Economic Review of Agriculture, Nairobi, 2011. 87 88