245 Environmentally and Socially Sustainable Development December 2004 Findings reports on ongoing operational, economic, and sector work carried out by the World Bank and its member governments in the Africa Region. It is published periodically by the Knowledge and Learning Center on behalf of the Region. The views expressed in Findings are those of the author/s and should not be attributed to the World Bank Group. IMPORTANT NOTICE: Effective November 2004, Findings and InfoBriefs will only be available electronically. Register your e-mail address at www.worldbank.org/afr/ findings to continue receiving the electronic version. Tanzania's Tea Sector: Constraints and Challenges' Tea was first planted in Tanza- a quarter of Tanzania's tea produc- nia in 1902, when German settlers tion during the early 1980s. Most introduced the crop to the Agricul- of the smallholder tea leaf went to tural Research Station in Amani the eight Tea Authority-owned fac- and Rungwe. Commercial produc- tories for processing, and the rest tion began in 1926 and increased to factories owned by the estates. considerably after World War II, Despite its apparent success, when the British took over the tea there were numerous signs of dis- plantations. By 1960 Tanzania's tress in the smallholder sector tea production reached 3,700 tons which were vividly summarized in of made tea (a little less than 0.5% a World Bank report in 1983. In- of world's total of 800,000 tons). terestingly, the report was written Before independence, tea was when the smallholder sector was produced on estates, a common at its peak, implying that while the practice in Africa and South Asia. sector appeared healthy, the fun- All tea-related matters were damentals were poor. By the mid- handled by the Tanganyika Tea 1990s, smallholders' share dropped Board. Smallholder tea farming below 10 percent and by 1998 it fell begun during the 1960s. In 1968, to 5 percent, the lowest level since the government initiated a full- tea was introduced as a small- fledged smallholder tea develop- holder crop. Contributing to the ment program, and all aspects of decline were low prices and late smallholder tea marketing and payments by the Tea Authority, old trade were turned over to the Tan- and inefficient processing facto- zania Tea Authority which as- ries, inadequate use of inputs, run- sumed a wide array of responsibili- down transport equipment, poorly ties. maintained feeder roads (i.e., roads The Authority promoted small- connecting farms to tea factories), holder tea production, typically on and low yields due to failure to adopt plots of about a third of a hectare. new varieties. Findings Tea expansion was assisted by the The problems of the industry donor community, including two were reflected in the estate sector World Bank lending operations. only in a limited way. When Tan- Smallholders accounted for about zania nationalized most large com- panies during the 1960s and early ward reform was privatization of regulatory and development func- 1970s, tea estates were ex- the two nationalized estates, a pro- tions of the Tea Authority. The Tea empted--with two exceptions in cess that extended from 1988 to Act of 1997 established the Tea the East Usambaras. The 1993. Initially, the government Board of Tanzania and the Tanza- Kwamkoro estate (630 hectares) considered three options: do noth- nia Smallholder Tea Development was nationalized in 1967 and the ing and let the estates and their Agency. Their functions were set Bulwa estate (680 hectares) was factories close; let the estates con- out in the Tea Regulations of 1999. "bought" by the government in tinue producing at a loss with mini- The Tea Board is responsible for 1971. Before nationalization the mal renovation over the next 10 regulating tea cultivation and pro- two estates together produced more years, by which time their residual cessing, licensing tea blenders and than 1,800 tons of made tea. Pro- value would be zero; or fully reha- packers, licensing and controlling duction dropped to 300 tons in the bilitate the estates with external tea exports and imports, collecting mid-1980s as almost two thirds of assistance. The third option was statistics on the tea industry, and the original 1,300 hectares were selected, mainly for political rea- representing the government in abandoned. The factors behind the sons. international tea forums. The Tan- deterioration were similar to those The Commonwealth Develop- zania Smallholder Tea Develop- in the smallholder sector. ment Corporation, a statutory cor- ment Agency is responsible for pro- Public research on tea also ran poration of the British Government moting and developing the small- into major problems. Before inde- was invited to purchase a 60 per- holder tea sector, advising the Min- pendence, research for the East Af- cent equity share in the estates, istry of Agriculture and Food Secu- rica tea producing region was con- with the rest to be retained by the rity on tea industry matters, offer- ducted by the Tea Research Insti- Tea Authority. They would form a ing extension services to tute of East Africa. Following the joint venture to rehabilitate the es- smallholders, and monitoring the collapse of the East African Com- tates. The incremental funding privatization of Tea Authority fac- munity in 1977, the research pro- was estimated at £5.9 million. In tories. gram was transferred to the De- 1995, the Commonwealth Develop- Another important step in tea partment of Research and Devel- ment Corporation and Karimi Ag- sector reform was the decision to opment of the Ministry of Agricul- riculture signed a memorandum of privatize the tea factories. Of the ture and Cooperatives, but the pro- understanding to merge the two six Tea Authority-owned tea facto- gram was inadequately funded. The tea estates--Karimi was a com- ries put up for sale in 2000, four tea estates contracted with a UK pany owning an 882-hectare tea were in private hands as of Novem- university to operate a tea re- estate in the East Usambaras--and ber 2001 and three of them have search unit, housed in one of the finally the two companies merged. begun renovating the facilities and estates in the Southern Highlands. In 2001, it was understood that that paying farmers more promptly. The research focused primarily on the role of the Commonwealth De- The research program faced sev- production systems with high in- velopment Corporation had been eral problems and by the mid-1980s put intensity, as practiced in es- fulfilled and the new company, the was in a state of collapse. The Tea tate tea production. East Usambaras Tea Company, Research Steering Committee was sold to Global Tea and Com- formed in 1988 to arrest the de- The Road to Recovery modities, a United Kingdom-based cline in research recommended tea packing company. The East creation of an independent re- Deterioration of the two nation- Usambaras Tea Company cur- search organization funded prima- alized estates, the poor perfor- rently operates three tea factories, rily through industry levies. The mance of the smallholder sector, is the third largest tea producer in Tea Research Institute of Tanza- and the collapse of the research Tanzania, provides employment to nia was finally established in 1996 system clearly signaled that broad- some 3,500 workers, and produces as a nonprofit organization. In based reforms were needed to re- more than 3,600 tons of made tea. 1997, the Ngwanzi Tea Research vive the sector. The first step to- Next came the separation of station, a privately funded organi- zation in the Southern Highlands tea, commanded a 35 percent pre- households. The imports continue was officially incorporated into the mium over Malawian tea, and sold because of this demand, the diffi- Institute. In 1998, a similar trans- for 18 percent less than Burundian culty of monitoring trade in rural fer to the Institute from the gov- tea and 25 percent less than areas, and incentives on the sup- ernment-owned and managed Kenyan tea, the highest quality ply side (importers' avoidance of Marikitanda Tea Research Station among the teas sold at Mombasa. VAT and some exporters' avoidance in the East Usambaras took place. Data for 2001 and 2002 show even of high export taxes at home). Opin- Currently, the Institute is man- better performance. ions about the "problem" and how aged by a 10-member board, with Tea research is on a solid foot- to solve it are mixed. Some sug- broad representation, including ing. Both research stations-- gest that that the war on illegal tea estates, smallholders, and the gov- Ngwanzi and Marikitanda--are imports and smuggling must be ernment. As a non-statutory body, working on several projects rang- strengthened and should involve the Institute can use merit and ing from the development of new the Tea Board, Tanzania Revenue performance criteria rather than tea varieties to the optimal use of Authority and the police. Others seniority to determine the career fertilizer and soil and water con- have noted that what some see as paths of its researchers. The In- servation while the technology a smuggling problem is really an stitute is funded by the industry, transfer unit successfully dissemi- excess taxation problem, since the receiving 1.5 percentage points of nates research results to tea grow- illegal importers bring in their car- a 2.5 percent levy on the net sale ers. The research institute is also goes free of taxation, thus making value of made tea and the other 1 engaging in contractual extension their tea much cheaper than the percentage point covering the op- services with the newly privatized locally produced tea. Naturally, any erational expenses of the Tea tea companies. buyer would prefer buying cheaper Board. Although smallholders con- These are solid achievements, tea than the more expensive local tribute just one-tenth of the tea but several issues still require at- tea. An alternative to the failed levy (because of their small share tention: the ban on made tea im- import ban would be to levy an im- in total output), one third of the ports, taxation, the role of the Board port duty on tea of, say, 5 percent. Institute's budget is earmarked for and the ministries, and infrastruc- This policy would have several ben- activities to benefit them. Dis- ture. The ban on black and packed efits. Tax revenues would be gen- semination of research findings to tea imports has been in place since erated, the quality of imported tea estates and small tea growers is the inception of the Tea Author- could be monitored, accurate sta- managed by the institute's Tech- ity. The ban on packed tea was tistics could be collected to improve nology Transfer Unit. imposed in order to protect the do- policymaking and investment de- mestic blending and packing in- cision making, legitimate jobs will Recent Performance and dustry. The motivation behind the be created for importers, traders, Constraints ban on black tea imports is not and shop owners, corruption will be clear. Despite the ban, a consider- reduced, and consumers could pay The reforms have had a positive able part of the domestic market lower prices for tea. This policy effect on the tea sector. Production is supplied by "illegal" imports from action should be part of a compre- of made tea rose from about 20,000 neighboring countries. While there hensive revision of the tax code, tons in 1990, to about 26,000 tons are no solid estimates on the which would ideally include a move during the 2001 and 2002 seasons. amount of tea imports, industry to a uniform import duty across the Reports by government officials representatives and government board. and traders at the Mombasa auc- officials concur that it is between Despite frequent amendments, tion indicate that the quality of 30-35 percent of domestic con- the tax code remains unnecessar- smallholders' tea has improved sumption. Industry representa- ily complicated. There are too considerably as well, claims that many taxes and the rates are too are supported by the numbers. In tives report that the imported tea high. Tea producers are subject to 2000, for example, Tanzanian tea f is of secondary quality, in high de- tched the same price as Ugandan mand among low-income rural as many as 44 taxes, levies, and licenses. High tax rates can lead ban spawns corruption.) the public sector should be in- to tax avoidance and corruption. In addition, violations of regula- volved only in monitoring, regu- And administering the taxes takes tions are frequent. For example, lating, and disseminating infor- a substantial amount of staff time the 1997 Tea Act stipulates that mation. Creation of a new tea for producers as well as the govern- the Tea Association has the right auction, proposed by some, ment. A recent government report to nominate two members to its seems unnecessary since the estimated that the nominal protec- Board: "The Board of Directors shall Mombasa auction well serves tion coefficient on the tea sector consist of ... two other members the interests of the entire East had increased from ­55.2 in 1990- representing the interests of li- African tea producing commu- 93 to ­77.0 in 1994-99, with the censes nominated by the Tea As- nity. negative sign indicating taxation. sociation of Tanzania amongst Thus, despite the frequent farmers or manufacturers." How- This article was prepared by changes and amendments to the ever, as the government review of John Baffes, Senior Economist, tax code, taxes are not being elimi- the agriculture sector noted that: Development Prospects Group. It nated or reduced; they are just "The President did not respect this is an extract of a full document, changing names. Streamlining the legal provision in a reshuffle of the Tanzania's Tea Sector: Con- tax code and reducing the tax bur- [Tea and Sisal] Crop Board mem- straints and Challenges in a den should be a priority. bers in June 1999. Because of that Global Environment, Africa Re- Both the Tea Board and the Min- reshuffle most of the members of gion Working Paper. istry of Agriculture and Food Secu- the Coffee, Cotton, and Cashewnut www.worldbank.org/afr/wps. rity still have too much discretion- Associations, who were `a titre per- ary power. For example, Article 22 sonnel' member of the crop Boards, of the Tea Act of 1997 indicates lost their membership of the Board that the Tea Board may refuse li- as well." censes on "any ground which may Inadequate infrastructure has appear to it to be sufficient." Article been a major reason for the tea 29 of the 1999 Tea Regulations sector's poor performance and an states that "the Board shall, in is- impediment to the sector's devel- sues relating to quality in respect opment. Because green leaf must of domestic and export market, be be processed within six hours of the final arbitrator." Wielding this plucking, rehabilitation of feeder excessive power, the Board has roads used for transporting green denied licenses for imports of made leaf from farms to factories must and packed tea, a questionable be given priority. But most of the policy on economic grounds and infrastructure problems (such as one that entirely ignores issues of poor quality of the national road consumer welfare. Penalties for system and frequent disruptions in violating Tea Board regulations are electricity supply) are not specific high--often as high as $ 2,000, to the tea sector and need to be which is 10 times the per capita dealt with at a broader level. While GDP (equivalent to a fine of improvement of infrastructure of $350,000 in the United States). a public goods nature needs public Despite such stiff penalties a third sector involvement, some infra- of Tanzania's domestic tea demand structure problems need to be re- is supplied by "prohibited" imports, solved by the private sector, such implying that tea smugglers are as rehabilitating tea factories, not caught (the ban is ineffective) building new ones, replacing trans- or are caught and not fined (the port equipment, and the like. Here,