The Rise and Demise of the Kenya Planters Cooperative Union

The collapse of the Kenya Farmers Association, the Kenya National Federation of Cooperatives and the Kenya Grain Growers Cooperative Union, and now the Kenya Planters Cooperative Union makes an interesting study of the cost of patronage in public institutions. Attention should now turn to the remaining so-called apex cooperative organizations. Many are already in the advanced stages of the diseases that afflicted those that have already gone away.

According to the Cooperative Bank of Kenya, in its book, Cooperative Banking in Kenya, the Kenya Planters Cooperative Union (KPCU) was set up by colonial government “as a tool to accelerate agricultural development.” It was one of the giant cooperatives that came to be known as “apex organizations.” The first of these giant organizations was the Kenya Cooperative Creameries, best known as KCC which was registered in February 1931. The second was the Kenya Farmers Association registered the same year followed by the KPCU which was registered in 1937 with a specific purpose— “to deal with the marketing of coffee.”

Sadly all of them have died—although KCC was revived—just as they were registered. The last was the KPCU which has now finally “accepted” its demise. It was placed under receivership –from which no one expects it to emerge - by the Kenya Commercial Bank which it owes Shs 700 million. Other major creditors are the Coffee Board of Kenya which is owed Shs.200 million, the Coffee Research Foundation owed Shs 100 million, the Roads Board owed Shs 100 and the farming community owed Shs 150 million.

The Credit Side of the Story

On the other side of the balance sheet, KPCU is owed Shs 3.4 billion, enough to clear all –or nearly all– its debts. . In 2005, the then minister for cooperative development and marketing Mr. Njeru Ndwiga in a statement to parliament, listed the debtors as the following:

1. • Mr. Pius Ngugi with Shs 590 million,
2. • the late Mbiyu Koinange (cabinet minister) with Shs 268 million,
3. Mr. Robert Mungai with Shs 113 million,
4. Mr. Morris Mugo with Shs. 174 million,
5. Mr. Gitere Kahira with Shs 43 million,
6. Mr. Julius Macharia with Shs 41 million,
7. Mr. S.N. Gatabaki with Shs 34 million and
8. Mr. Njenga Karume with Shs 31 million.

Why then has KPCU not followed these debtors so that it pays its creditors? Part of the answer was given by the minister when he said the debtors “were politically well connected people.” The other half of the answer is the concern in this article. Our argument is that these politically well connected people offered services in form of protection for which they were paid a “fee.” The fee included not just the money, it also included staff placement for their cronies which distorted the management of KPCU to the extent that it was blotted with incompetent staff. It was the liberalization of the coffee sector which uncovered the inability of KPCU to compete and finally made it collapse.

In May 2005, the then chairman of KPCU Mr. Stephen Kirubi gave an interesting “economic performance profile” to the company’s shareholders in his annual report. The underlying issues are not specifically stated, but there is much that can be read in the report regarding the forces that shaped the running, operations and profitability of the union.

First of all, Mr. Kirubi, who was almost immediately kicked out of the KPCU management together with his group, noted the adverse effects created by the liberalization of the coffee industry on KPCU operations. “Following the implementation of government coffee industry reform program, the industry is trying to reel from adverse effects that have led to near static levels in production.” Nevertheless he went ahead to say that the company had made many great improvements in its “financial performance.”

Profits without Sales

“The company has continued to show improved performance in its finances. During the year ended September 30, 2004, the company was able to make an operating profit of Shs.197 million up from Shs.151 million realized last year, representing a 30% increase in profitability. This was despite the reduced coffee processing volumes recorded in the year 2003/2004 compared to the year 2002/2003.”

How was that possible? Mr. Kirubi answers: “This impressive performance was achieved through continued application of stringent cost-cutting measures and prudent management of the company resources, which resulted in reduction of our expenses by Shs.100 million during the year under review.” What Mr. Kirubi is saying is that the company was misspending money to the extend of Shs100 Million. Sheer poor management caused cost more money than the profits it made even during the best of the years. By simply controlling misuse of funds in running costs, the company made more profit than it had made selling coffee.

The next question is: On what was this money spent? No answer is given but it is easy to associate it with the debt owed to KPCU by the politically well-connected people. It could have been the fee for protection of the management. Now that KPCU was going down, no one was needed to protect it. In addition, it was said that some of these “protectors” had accumulated so much wealth that they were anxious to buy out the KPCU themselves. Protection also comes with the cost of over establishing the company in terms of staff as it absolves more and more villagers, relatives and friends of those who offered protectio

This was the case in KPCU. Left alone the mess was laid bare and it went on overdrive to remove the excess staff. The staff were too many, untrained and incompetent. Mr. Kirubi explained this to the Annual General Meeting, “The Company has continued to carry out staff rationalization process as one of the main components falling under the ongoing restructuring programme.”

“This process aims at creating a lean and efficient workforce”

By 2005, the company had already spent another Shs. 140 million to shed off a small part of the excess workforce through voluntary retirement scheme. This was part of an on-going corporate governance improvement program through which the directors were reasserting their powers. A new focus in management was also being shaped through which the directors were hoping to find a new safe-guard from farmers they had neglected over the years. Regarding this farmer-centric strategy, the report went on, “Out of a total of US$75 billion worth of earnings in the international coffee trade, producers receive only about 7% of this amount. As one of the largest coffee producers in the world, Kenya’s is dismally small as the bulk of the earnings are retained in the value addition stage where farmers have no access.”

Notwithstanding the fact that this realization should have been apparent all through the 70-year period of the KPCU operation, the company was now willing to “enable farmers access the gains available” through the process of value addition. “The company has already embarked on development of a number of coffee brands targeting various segments” of the local market. “This is in line with the company’s ambitious program that will soon be launched, aimed at promoting domestic consumption, to enable Kenyans enjoy their own coffee that has won international acclaim as a high quality beverage.”

Other efforts by which KPCU management hoped to fight competition and endear themselves to the farmers included modernization of coffee processing and IT facilities. The purpose was to install, throughout the country, automated processing plants that would be less labor–intensive “to enable the company recoup benefits of the related efficiencies.”

“KPCU Collapse Good riddance!”

Finally, the KPCU planned to help improve the quality of coffee by educating the farmers and exposing them to modern coffee husbandry practices. All these measures, if they could be helpful at all, came too late. Competition from fresh enterprising companies had already taken away farmers and their coffee. (See comment on page 32). In addition, the Coffee Act 2001, (see separate story) had already taken away the clout KPCU had.

Many of the functions of the KPCU were taken over by the newly established regulator, the Coffee Board of Kenya. And it was just a matter of time before the two would be locked in a battle. The crippling battle came into the open when the board refused to give a milling license to KPCU, insisting that KPCU pays its debts first. When the crisis because obviously irresolvable, the Kenya Commercial Bank, the largest creditor, put KPCU under receivership. Although the government says it is committed to reviving it so as to safe-guard farmers’ interests, this probably won’t happen. If the reaction of the minister for cooperative development and marketing Mr. Joseph Nyaga is anything to go by, the fall of the KPCU was good riddance

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