Brooke Bond Tanzania, Ltd. and the Mufindi Tea Company), provides employment to some 3,500 workers, and produced more than 3,600 tons of made tea in
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Tanzania™s Tea Sector Constraints and Challenges Africa Region Working Paper Series No. 69 June 2004 Abstract T anzanian tea is grown under two sys-tems: by smallholders, on plots averag-ing less than a hectare, and on large estates, which often exceed 1,000 hectares. In the mid-1960s the government introduced steps to encourage smallholder production, and by 1985 smallholders accounted for almost 30 percent of total tea output. By the late 1980s, however, serious problems were visible in the smallholder sector and by 1995, as the sector™s share fell below 10 per-cent, it was clear that only broad-based pol-icy reforms could bring the sector back from the brink. The government attempted to revive the sector in the early 1980s by privatizing and rehabilitating two tea estates, which had been nationalized in the 1970s; restructuring the Tea Board; privatizing the six state tea factories; and revamping public research on tea. These policy initiatives have had some success, but much remains to be done to fully revitalize the tea sector. Infrastructure is still inadequate. The tax structure is too complex, with too many taxes and rates that are too high. Despite the restructuring, the Tea Board and the Ministry of Agriculture are still too powerful. And trade policy needs to be revised to allow imports of made tea. The Africa Region Working Paper Series expedites dissemination of applied research and policy studies with poten-tial for improving economic performance and social conditions in Sub-Saharan Africa. The Series publishes papers at preliminary stages to stimulate timely discussion within the Region and among client countries, donors, and the policy research community. The editorial board for the Series consists of representatives from professional families appointed by the Region™s Sector Directors. For additional information, please contact Paula White, managing edi-tor of the series, (81131), Email: pwhite2@worldbank.org or visit the Web site: http://www.worldbank.org/afr/wps/index.htm. The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s), they do not necessarily represent the views of the World Bank Group, its Executive Directors, or the countries they represent and should not be attributed to them. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
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Authors™Affiliation and Sponsorship John Baffes Email address: jbaffes@worldbank.org This paper is part of a larger effort by the Africa Region in collaboration with the Development Prospects Group to assess the performance and identify policy impediments of Tanzania™s ex-port crop sectors. The views expressed here should not be attributed to the World Bank. I would like to thank Takamasa Akiyama, Betty Dow, Donald Mitchell, Hans Timmer, and Nanae Yabuki for comments and suggestions on earlier drafts. I am grateful to Ria Ketting, George Kyejo, S. H. Mijinga, Bruno J. Ndunguru, Hadija Shakombo, R. J. Surrey, and staff at the East Usambaras Tea Company for the valuable information obtained during interviews. I would also like to thank the World Bank country office staff in Dar es Salaam, especially Ladisy Chengula and Gloria Sindano.
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Table of Contents I. Introduction..1 II. A Brief History of the Tea Industry in Tanzania..1 III. The Road To Recovery4 Rehabilitating the East Usambaras Tea Estates..4 Separating Regulation and Smallholder Promotion..5 Privatizing Tea Authority-Owned Factories.6 Reviving Research.6 Restructuring the Local Tea Blending and Packing Industry..7 IV. Recent Performance and Constraints..7 Import and Export Bans Increase the Burden on the Tea Sector8 Taxation Is Too Complex and Rates Are Too High.9 The Tea Board and the Ministries Have Too Much Discretionary Power.10 Infrastructure Is Inadequate11 V. Conclusion.12 Appendix A: The World Tea Market20 The Global Balance.21 Tea Prices.21 The Mombasa Tea Auction.22 A Liberal International Policy Environment..24 Moderate Growth in the Long Term..25 References..36 Box Box 1: Box 1: Tea Estate ProductionŠBrooke Bond Tanzania, Ltd13 List of Tables Table 1: Production and Yields of Made Tea by Sector, 1975/76Œ1999/2000..14 Table 2: Principal Institutions Involved In The Tanzanian Tea Sector..15 Table 3: Average Prices At The Mombasa Auction By Country Of Origin, 1996Œ200116 Table 4: Destinations Of Tanzanian Tea Exports, 1970Œ2002 (Tons)..17 Table 5: Production Of Made Tea By Company, 1996Œ200018 List of AnnexTables Table A 1: Global Balance In The Tea Market, 1960Œ2001 (Thousands Of Tons).27 Table A 2: Tea Sold At Auctions, Various Years (Thousands Of Tons).28 Table A 3: Sales At The Mombasa Auction.29 Table A 4: Price Ranges At The Mombasa Auction, Sale No. 44, November 5, 2001.30 Table A 5: Tea Prices, 1960Œ2002 (US Dollars Per Kilogram)A..31 Š 1 Š
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Table A 6: Ten-Year Demand Outlook For Black Tea, 2000Œ10.33 Table A 7: Ten-Year Supply Outlook For Tea, 2000Œ10.34 Figure Figure 1: Tea Production and Marketing Structure in Tanzania19 List of Annex Figure Figure A 1: Monthly Tea Prices (US dollars per kilogram).35 Figure A 2: Annual Rea Prices (US dollars per kilogram)35 Š 2 Š
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I. Introduction Tea contributes more than $30 million to Tanzania™s export earnings, making it the fifth largest export crop after cashews, coffee, cotton, and tobacco. More than three-quarters of Tanzania™s tea is exported. The tea industry provides employment to 50,000 families and directly or indirectly affects as many as 2 million Tanzanians. Though tea is eco-nomically important for Tanzania, the country produces less than 1 percent (25,000 tons) of estimated world tea production of 3 million tons. Before Tanzania™s independence in 1961 large estates dominated tea production. By the mid-1960s the government was encouraging smallholder production, with some success, and by 1985 smallholders accounted for almost 30 percent of output. By the late 1980s, however, there were visible signs of distress in the smallholder sector. Late pay-ments to farmers by the Tea Board, the collapse of the research system, and inadequate investment in tea factories, roads, and transport equipment contributed to the decline. By the early 1990s it was clear that only broad-based policy reforms would steer the sec-tor back in the direction of success. This paper examines the performance of the Tanzanian tea sector and identifies policy-driven impediments, especially for the smallholder sector. It looks at the causes of its poor performance, evaluating policy reform initiatives and exploring alternatives in the context of the world tea market. The analysis is complemented by a review of the world tea market (see Appendix A). II. A Brief History of the Tea Industry in Tanzania Tea was first planted in Tanzania in 1902, when German settlers introduced the crop to the Agricultural Research Station in Amani and Rungwe. Commercial production be-gan in 1926 in Usambaras and Njombe. In 1934 Tanzania produced 23 tons of made tea. After World War II, when the British took over the tea plantations, production rose from 2,723 hectares in 1945 to 7,336 hectares in 1960, yielding 3,722 tons of made tea. Before independence tea was produced on estates, a common practice in many African and South Asian tea producing countries. All tea-related matters were handled by the Tanganyika Tea Board, renamed the Tea Board of Tanzania after independence. Smallholder tea farming begun in the early 1960s under the supervision of the Ministry of Agriculture. In 1968 the government initiated a full-fledged smallholder tea devel-opment program, and all aspects of smallholder tea marketing and trade were turned over to the Tanzania Tea Authority, established by an Act of Parliament as a state-owned corporate body. The Tea Authority assumed a wide array of responsibilities as the following excerpt shows: Š 1 Š
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tion of estate production. Estates have their own transportation equipment and process-ing facilities and so are not dependent on public infrastructure. Most of the workforce lives in housing provided by the estates, which also provide medical services, schools, and other facilities. The estates, therefore, have access to a constant flow of high-quality labor (see box 1). The problems of the industry were reflected in the estate sector only in a limited way. When Tanzania nationalized most large companies during the 1960s and early 1970s, tea estates were exemptedŠwith two exceptions. Nearly all estates were foreign owned, and there were fears that nationalization would lead to retaliation by the Lon-don auction, which handled all Tanzanian tea. The Kwamkoro estate, operated by Bird and Company (Africa) with 630 hectares under tea, was nationalized in 1967, and the Bulwa estate, operated by Sikh Sawmills Company with 680 hectares under tea, was bought by the government in 1971. These estates were taken into public ownership be-cause they formed part of the operations of nationalized companies involved in other activities. The Kwamkoro estate was placed under the Sisal Corporation, later absorbed by the Tanzanian Sisal Authority, and the Bulwa estate was placed under the Tanzanian Wood Industry Corporation. The Tea Authority took over the Bulwa estate in 1977 and the Kwamkoro estate in 1986. Before nationalization the two estates together produced more than 1,800 tons of made tea. After nationalization production dropped to 300 tons in the mid-1980s as al-most two thirds original 1,318 hectares were either abandoned or partially planted. The factors behind the deterioration were similar to those in the smallholder sector. Reports by the Agricultural Planning and Marketing Division of Tanzania™s Ministry of Agricul-ture and Livestock Development blamed labor shortages because of late payments of wages and poor housing conditions for workers, inadequate maintenance of feeder roads, underinvestment in factories, old and badly maintained transport equipment, lack of fuelwood due to inadequate replanting of trees, and lack of credit. Public research on tea also ran into major problems. Before independence re-search for the East Africa tea producing region was conducted by the Tea Research In-stitute of East Africa. Following the collapse of the East African Community in 1977, the research program was transferred to the Department of Research and Development of the Ministry of Agriculture and Cooperatives, but the program was inadequately funded. The tea estates contracted with a U.K. university to operate a tea research unit, housed in one of the estates in the Southern Highlands. The research focused on pro-duction systems with high input intensity, as practiced in estate tea production. How-ever, some valuable research results were also transferred to smallholders. Š 3 Š
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III. The Road To Recovery Deterioration of the two nationalized estates, the poor performance of the smallholder sector, and the collapse of the research system clearly signaled the message that broad-based reforms were needed to revive the tea sector. The first step was the privatization and rehabilitation of the two Tea Authority estates, which took place from 1988 to 1993. Restructuring the research system came next with the establishment of the Tea Research Steering Committee in 1988, which recommended creating an independent research or-ganization (which was not done until 1996). More pressure for reforms came in 1994, when the Ministry of Agriculture and Cooperatives recommended privatizing the Tea Authority factories to open the way for a more efficient collection and payment system, creating a Tanzanian Smallholder Tea Farmers Development Agency to promote smallholder production, reducing the tax and tariff structure to attract investment, and establishing a tea auction. These recom-mendations complemented those made by the World Bank (1994) that same year: allow valuation of tea exports at the market rate of foreign exchange, privatize management and perhaps even ownership of the Tea Authority factories, and transform the Tea Au-thority into a regulatory entity. Rehabilitating the East Usambaras Tea Estates The first step toward reform was privatization of the two nationalized estates in the East Usambaras, a process that extended from 1988 to 1993. The government considered three options: do nothing and let the estates and their factories close; let the estates con-tinue producing at a loss with minimal renovation over the next 10 years, by which time their residual value would be zero; or fully rehabilitate the estates with external assis-tance. The third option was selected, mainly for political reasons (Faber 1995). The Commonwealth Development Corporation, a statutory corporation of the British Government which invests in enterprises in developing countries, was invited to purchase a 60 percent equity share in the estates, with the rest to be retained by the Tea Authority. They would form a joint venture to rehabilitate the estates. The incremental funding was estimated at !5.9 million. RehabilitationŠlong, difficult, expensive, and ultimately successfulŠtook five years and cost !2.6 million more than expected as a result of underestimating the costs of rehabilitation (the total cost was !8.5 million). The privatization and rehabilitation of the two tea estates was important to the success of tea sector reform and offered an im-portant lesson (Faber 1995, p. 1346): Without a program of reforms, the rehabilitations will not succeed; without the rehabili-tations, the country will lack the foreign exchange to sustain the program –. Perhaps the Š 4 Š
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most important lesson of all is that continuity of commitment, a deep pocket and plenty of patience are likely to be required of those undertaking rehabilitation projects. Great re-wards may ultimately be gained but they have to be struggled for, often for longer than originally anticipated. In 1995, the Commonwealth Development Corporation and Karimi Agriculture signed a memorandum of understanding to merge the two tea estatesŠKarimi was a company owing an 882-hectare tea estate in the East Usambaras. Following some difficulties ini-tially, the two companies were finally merged. In 2001, it was understood that that the role of the Commonwealth Development Corporation had been fulfilled and the new company, the East Usambaras Tea Company, was sold to Global Tea and Commodities, a United Kingdom-based tea packing company. The East Usambaras Tea Company cur-rently operates three tea factories, is the third largest tea producer in Tanzania (after Brooke Bond Tanzania, Ltd. and the Mufindi Tea Company), provides employment to some 3,500 workers, and produced more than 3,600 tons of made tea in 2000. Separating Regulation and Smallholder Promotion This divestment of commercial activities was just one step in the reform of the Tea Authority. Next came the separation of its regulatory and development functions. The Tea Act of 1997 established the Tea Board of Tanzania and the Tanzania Small-holder Tea Development Agency. Their functions were set out in the Tea Regulations of 1999. The Tea Board is responsible for regulating tea cultivation and processing, licens-ing tea blenders and packers, licensing and controlling tea exports and imports, collect-ing statistics on the tea industry, and representing the government in international tea forums. The Tanzania Smallholder Tea Development Agency is responsible for promot-ing and developing the smallholder tea sector, advising the Ministry of Agriculture and Food Security on tea industry matters, offering extension services to smallholders, and monitoring the privatization of Tea Authority factories. The Smallholder Tea Develop-ment Agency is a member of the Tea Association of Tanzania, where it represents the interests of smallholders. Although the Tea Association of Tanzania has been around since 1943, it began to take a much more active role in 1989 when it was established as a private entity. Its objectives are to promote and protect the interests of the tea industry in Tanzania, to influence government policy affecting tea, and to negotiate on behalf of the industry with government, the Tea Board, and trade unions. The principal institu-tions in the Tanzanian tea sector and their roles are outlined in table 2. Š 5 Š
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Privatizing Tea Authority-Owned Factories One of the most important steps in tea sector reform was the decision to privatize the tea factories (see figure 1 for the current marketing structure). Of the six Tea Authority-owned tea factories put up for sale in 2000, four were in private hands as of November 2001 and three of them have begun renovating the facilities and paying farmers more promptly. Long delays in payment were the norm under Tea Authority ownership. The four privatized factories are Katumba and Mwakaleli, which are now under Wakulima Tea Company and managed by Tanzania Tea Packers; Mponde Tea Factory, renamed the New Mponde Tea Factory; and Maruku Tea Factory, renamed the Kagera Tea Company. The two factories undergoing privatization are the Lupembe Tea Factory and the Dabaga Tea Factory (Mdee 2001, pp. 10-11). Reviving Research Until 1996 tea research was funded by the government through the Ministry of Agricul-ture and Cooperatives. By the mid-1980s the research program was in a state of col-lapse. The Tea Research Steering Committee formed in 1988 to arrest the decline in re-search recommended creation of an independent research organization funded primar-ily through industry levies. The Tea Research Institute of Tanzania was established in July 1996 as a non-profit organization (TRIT 2000/01). In July 1997, the staff Ngwanzi Tea Research station, a privately funded organization in the Southern Highlands was officially incorporated into TRIT. In October 1998 a similar transfer to TRIT from the government-owned and managed Marikitanda Tea Research Station in the East Usmbaras took place. In 1998, Cranfield University at Silsoe in the United Kingdom was appointed as the managing agent of TRIT, which reports to the Board of Directors. Currently, the Institute is managed by a 10-member board, with broad represen-tation, including estates, smallholders, and the government. As a nonstatutory body the Tea Research Institute can use merit and performance criteria rather than seniority to determine the salaries and promotion paths of its researchers. Dissemination of research findings to estates and small tea growers is managed by the institute™s Technology Transfer Unit. As recommended by the steering committee, the institute is funded by the industry. The institute receives 1.5 percentage points of a 2.5 percent levy on the net sale value of made tea; the other 1 percentage point covers the operational expenses of the Tea Board. Although smallholders contribute just one-tenth of the tea levy (because of their small share in total output), one third of the institute™s budget is earmarked for activities to benefit them. Š 6 Š
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