Effects of County Cess on Costs and Returns in the Maize and Irish Potatoes Sectors in Kenya

Abstract

Executive summary:

The agricultural sector in Kenya contributes about 25.4% of GDP, supports nearly 80% of the rural population and accounts for 65% of total exports (RoK, 2015). Despite the importance of the sector to the economy and its potential for improving livelihoods, it faces various constraints including high and increasing production, marketing and processing costs. At marketing level, these costs could be due to high government taxes, among other factors. Following the implementation of the devolved system of governance in Kenya, county governments introduced various taxes to expand their sources of revenue by charging several fees and levies including produce tax/cess. These taxation measures are important revenue sources, but they could also stifle business growth and trade. The need for county governments to raise revenue to deliver services to its people has led to escalation of produce cess. Stakeholders complain that cess rates are high, arbitrary and changing from time to time. Another challenge has been the issue of double taxation, where the same product is charged more than once as it is transported across counties. Despite such complaints, there is scanty information on modalities of cess collection and its effects on costs and margins in agricultural value chains. To fill this knowledge gap, Tegemeo Institute undertook a study to gain more understanding about cess and assess how it influences costs and margins within the agricultural sector. The study adopted a value-chain analysis approach. Value chain analysis focuses on the build-up of costs and growth in value and distribution of returns along the value chain, hence a need to interview all actors in the value chain. Important chain actors for this study were farmers, county governments, and traders/transporters. The study focused on two value chains, maize and Irish potato for several reasons: they are major staples critical for food security in Kenya; their main production is concentrated in selected regions of the country; and, they are widely traded across counties allowing a value chain analysis approach from production to marketing. Trans Nzoia was selected as a source county for maize, while Narok and Nakuru were identified as source counties for Irish potatoes. Interviews with traders confirmed that the main markets for the two commodities at that time were Nairobi and Mombasa. v Data collection took place in the month of November 2016. The study relied mostly on primary data collected through focus group discussions (FGDs) and key informant interviews (KIIs). FGDs were conducted with farmers in the producing counties, while KIIs were conducted with county officials, cess collectors and traders/transporters. Interviews with traders/transporters were undertaken both at the source county and at the markets. Results showed that cess was charged at different collection points spread within the source county at a flat rate depending on the agricultural commodity. It was the main levy charged on maize and Irish potatoes, with counties mainly justifying it as a levy to support infrastructure development. However, it was observed that cess collection goes to the general treasury pool to be used together with other funds, not necessarily set aside for infrastructure development. On average, cess contributed about 2% of the total revenue collected in the source counties selected for this study. Cess collection points in the counties were determined by the convergence of exit routes from the production areas. Usually, cess collectors would estimate the capacities of lorries, as reported by traders without verifying the volume/weight of goods being transported. Cess rates differed between counties even for the same produce. These rates have largely remained unchanged since the time of local authorities and the complaints about their escalation with the advent of devolution is a perception. Cess charged at the market counties was higher than what was charged at the source counties. While counties argued that cess is important towards their revenue base, the traders were against levying of cess in Nairobi and Mombasa markets as they viewed this as double taxation.. Some of the challenges experienced by counties in cess administration include inconsistency in the amount levied (overall collection is dependent on the seasonality of the production cycle), loss of revenue due to under reporting by traders, lack of standardization for Irish potatoes packaging, and collusion between traders and cess collection clerks. While farmers had little knowledge on cess, traders largely viewed it negatively, expressing frustration that improvement in services such as upgrading of roads was slow despite them paying cess. They claimed that cess reduces their profits. Consequently, some traders had explored ways to reduce amount paid or evade payment through bribes to cess clerks, use of extended bags (for Irish potatoes) or use of alternative routes without cess collection points. vi However, these incidences were rare since the traders were required to produce evidence of payment at the source county as they moved to the destination markets. A key finding from this study is that cess was only charged in the producing and destination counties and not in every transit county that the produce passed through as is popularly believed. Secondly, there has been no escalation of cess charges under devolution. The rates in both producing and market counties have not changed from what was previously charged by local government authorities. The survey showed that maize from Trans Nzoia was charged cess at an average of KES 17 per 90kg bag. However, the same bag was charged cess at KES 70 upon entering the market in Nairobi and KES 64 in Mombasa. For Irish potatoes, a 70kg bag was charged cess at an average of KES 17 in Nakuru and KES 27 in Narok. Upon entering the markets, Irish potato cess was charged an average of KES 37 and KES 48 per 70kg bag in Mombasa and Nairobi, respectively. Cess charges were therefore higher in Nairobi market compared to Mombasa. In addition, cess accounted for different proportions of prices and margins across the two value chains and the various actors. For instance, total cess for maize and Irish potatoes was about 24 and 9 percent of marketing costs, respectively, while it accounted for 9 and 7 percent of farmers’ margins, respectively. On the other hand, cess was equivalent to 51% and 24%, respectively for maize and Irish potato traders’ margins. Proportion of cess was low at 4 % of farm gate price for both maize and Irish potatoes, and 2 % of retail price for Irish potatoes. Several recommendations can be drawn from this study. The study showed that cess rates differed across counties, which calls for standardization that would bring about predictability for traders. Cess charged in Nairobi and Mombasa markets was double that charged in producing counties for Irish potatoes and about four times more for maize and hence, there is need to assess the reasons for this escalation. The study also showed that there was loss in revenue in cess collection and it could likely constitute a bigger proportion of county revenue. Since the verification of volumes on transit relied on visual assessment, some traders had found out that the best means of reducing costs was to pack their lorries beyond the normal capacity while reporting lower figures to the collection clerks. This could likely lead to a bigger loss to the source counties. vii Loss of revenue can be reduced by curbing corruption at collection points, operating these points all days of the week, both day and night and adopting standard packaging sizes for Irish potatoes. This may call for capacity strengthening in the counties to improve collection through training for cess collection clerks, automation of revenue collection systems and exploring technologies for efficient weight measurement and verification. This study showed that cess was only charged in the producing and destination/market counties and that cess rates in producing counties have not changed from what was charged previously by local government authorities. Therefore, there is need to address misperceptions about cess being charged in every transit county and that the rates have been escalating. County governments should conduct civil education to enlighten the public on administration and use of cess. There is need to rethink through the structure of cess and its importance to counties. Currently, it only contributes about 2% to county revenue, yet it has important implications on margins of other value chain actors. There should be a national policy to guide counties on cess charges for specific agricultural commodities. This discussion on cess restructuring should also involve the Ministry of Agriculture in the various counties and not just the Treasury. This is necessary because while the treasury makes decisions on specific revenue sources, agriculture understands better the implications of cess charges to the farmers. There is also need to re-look at other transaction costs such as transport costs. The study showed that transportation-related costs accounted for the largest proportion of cost. While this is partly due to long distances to Nairobi and Mombasa markets, interviews with traders indicated that poor infrastructure contributed to the high cost of transportation. A possible solution is to ensure that produce cess contributes to maintenance and upgrade of infrastructure in order to reduce transportation costs.