Kenya’s tea industry compromised by labour cost inflation
On Monday 20th June 2016, the Employment and Labour Relations Court made a judgment order to increase employees’ wages in the membership of the Kenya Tea Growers Association in the commercial tea sector by 15% and 15% respectively for the period 2014 – 2015 alongside the upward adjustment of other perks. The net effect of the ruling has been to increase the cost of labour within this sector by between 60 to 75% over the two year period. It is of course worth noting that the sector is due another CBA adjustment, the same fell due on 1st January 2016.
The commercial tea sub-sector maintains 40% of Kenya’s tea Industry and the KTGA through its members employs 40,000 employees directly and over supports a further 200,000 dependents.
The tea industry as a whole plays a key role in the agriculture sector and Kenya’s economy at large with tea output contributing about 11% of the agriculture sector’s contribution of 25% to Gross Domestic Product (GDP). Tea is the highest foreign exchange earner for the Country.
Over the last 4 years, the industry has continued to suffer escalating production costs across the entire value chain against a backdrop of depressed prices at the Tea Auction. The period in question during 2014 witnessed the lowest tea prices ever experienced in the last 10 years. As a consequence, the net return to the industry has been low and unsustainable.
Labour is the single most expensive component in tea production, contributing between 50% -60% of the total production cost without taking into account the other indirect benefits provided by the commercial sector such as free water, electricity, housing, medical benefits and service gratuity that adds a further 30% on the employment costs.
During the period 2013 – 2014 the Unit cost of production per Kilogram of made tea was 1.9Usd while the average auction price of tea was about 1.7Usd. Tea Producers have no control over the market price for their product sold at auction and are price takers
It is noted that the wages paid by the tea sector are substantially higher than those paid in other agricultural enterprises within Kenya. The difference between Commercial Tea sector wages and wages covered by the Agricultural Workers Order was 107%. Where compared to other tea producing nations in the region, the Kenyan tea sector wage base is also well ahead. There has been no increase in the productivity threshold since the 1960’s despite dramatic improvements in unit productivity on the Estates.
In summary; the supply/demand balance which should set wage levels applicable to the sector no longer apply. This in turn undermines the competitiveness of Kenyan tea in the global market. Between 2009 and 2013 the Tea sector wage increase had been 54.0%. With the new ruling taking effect, the wage has escalated shot to 104% against an Inflation growth in the same period to 56.6.7% as at 2015.
High labour cost has rendered many low yielding fields unprofitable under hand plucking and farmers have been compelled to innovate by introducing mechanized harvesting, improved factory processing, replanting with higher yielding clones and improving their crop husbandry practices in order to survive.
In a region with high youth unemployment and a dire need for development, the industry must be allowed to thrive and investment be encouraged. Indeed, the aspirations espoused within Vision 2030 are founded upon a vibrant agricultural sector. Unlimited wage escalation puts all of this at risk and threatens the entire tea sector.
The ruling made on the 20th June is currently being reviewed and analyzed in detail, where after appropriate actions will be taken with the best interest of both the employees and business sustainability in mind.
Perhaps more importantly, the Kenyan economy as a whole will be negatively impacted by the ruling of 20th June 2016 in a number of ways:
- Revenue collection by KRA will diminish substantially as a result of declining profitability and lower corporation tax
- Kenya’s image as a destination for foreign investment will be tarnished.
- Investment in the tea sector will reduce, resulting in negative impact for local suppliers and contractors, and creation of fewer jobs.
- Smallholder farmers competing with commercial tea farms for the same pool of labour will have to pay more to attract hired labour, resulting in lower incomes earned by smallholder tea farmers.
The employees of KTGA are expected to adhere to the rule of law as the appeal process is pursued.