237 Environmentally and Socially Sustainable Development April 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. http://www.worldbank.org/afr/findings Tanzania's Coffee Sector Constraints and Challenges in a Global Environment C offee is Tanzania's largest when the Coffee Board began to export crop. It contributes make more timely payments to co- approximately US$115 mil- operatives. More comprehensive lion to export earnings, and pro- reforms became part of the policy vides employment to some 400,000 reform agenda under an IDA credit families. About 95 percent of cof- operation and accompanying cur- fee is grown by smallholders and 5 rency devaluation in 1992. The percent on estates. Only a quarter board became a marketing agent of smallholders use purchased in- rather than a marketer. In the puts. Two- thirds of coffee output 1992/93 season the government is arabica and one-third robusta. stopped announcing the amount of Coffee was introduced to Tanza- the advance payments made by the nia early in the 20th century as an cooperatives to the growers, leav- estate crop, but eventually became ing the decision to the coopera- a smallholder crop. During the tives. In March 1992 input mar- 1960s the cooperatives and the kets were opened to private trad- Coffee Board became involved in ers. A few months later exporters most aspects of marketing and were allowed to retain 10 percent trade of coffee. Such involvement of their export earnings in foreign culminated with the nationaliza- currency, and soon thereafter, 100 tion of most arabica coffee estates percent. More reforms came in in Northern Tanzania in 1973. 1993 allowing private sector par- Since then, the coffee sector has ticipation in marketing and pro- been subject to a shifting of power cessing coffee. During the 1994/ between the cooperatives and the 95 season private buyers could pur- Findings Coffee Board with the needs of the chase and process coffee in their sector never being seriously ad- own factories. dressed. The performance of the While some aspects of the sector sector deteriorated and reforms improved after the reforms, numer- were the only feasible alternative. ous constraints are still in place, The first steps in restructuring including the overly complicated the sector were taken in 1990 tax code, high taxation, excessive involvement of the state, and the inputs and coffee sales and, be- The processing capacity for cof- mandatory nature of the coffee cause of high default rates, credit fee has increased enormously. auction. for input use was available to only Before 1988 there were only two a few creditworthy (often large) union-owned coffee processing fa- Assessing the reforms farmers. The rest either received cilities. In 1988 two more arabica credit at very high interest rates (also union-owned) processing fac- A key impetus for the reforms was or received no credit at all. Conse- tories were added. Since 1993 at the declining share of export prices quently, input use declined. To re- least 12 new factories have been received by coffee growers. The verse this trend, the Coffee Board built. Coffee processing capacity in average producer's share of and the Coffee Association intro- Tanzania now exceeds 72 tons an arabica export price in the nine duced the National Input Voucher hour--40 tons an hour for arabica seasons prior to the reforms was Scheme, financed initially by the and 32 tons an hour for robusta. 60 percent; it rose to 73 percent in European Union using Stabex To put this capacity into perspec- the five seasons following the re- funds. Although received positively tive, Tanzania's total coffee output forms. The corresponding figures by the industry initially, there averaged 51,000 tons between 1980 for robusta are 59 and 69 percent. have been numerous reports of and 1988 and 43,300 tons between These figures imply a considerable forged vouchers as well as trading 1993 1999, implying that coffee fac- increase in the share, a signifi- at a discount for non-input uses. tories operate on average at about cant achievement in a period of de- Despite reports that the quality a quarter of installed capacity. clining coffee prices. of coffee deteriorated after the re- With respect to supply response, forms, data indicate that the dete- Constraints a simple comparison of pre- and rioration of quality has slowed con- post-reform averages is informa- siderably after the reforms, a re- Taxation of the coffee sector is too tive. Average coffee production was flection of mostly short-term issues high and the tax code is too com- 50,918 tons in the nine seasons (e.g., reduced input use, presence plicated. In 1997/98, for example, before 1994 and 45,065 tons in the of inexperienced traders, and high direct taxes totaled 195 Tsh a kilo- five seasons after 1994, a 13 per- competition due to overcapacity.) gram for arabica and 64 Tsh a ki- cent decline. By this simple mea- logram for robusta, or 16 percent Before 1994, 75 percent of coffee sure the impact of the reforms on of prices received by producers for was marketed by cooperatives, 19 production was disappointing. Dis- arabica and 20 percent for robusta. percent by other government orga- aggregating by coffee type, how- The shares were even higher for nizations, and 6 percent by private ever, shows a different picture. the 1998/99 growing season, at estates. Four seasons later the Mild arabica production declined almost 19 percent for arabica and market shares were 67 percent by nearly 20 percent while hard 23 percent for robusta. When all private buyers, 26 percent by coop- arabicas and robustas increased by indirect and other taxes due to erative cooperatives, 7 percent by about 10 percent. economy-wide distortions are estates, and 1 percent by other gov- Prior to the reforms, credit for added, the tax rate ranges between ernmental organizations. Two- inputs was integrated into coffee 50 percent and 70 percent. thirds of private buyers are verti- sales. The system, in a sense, cally integrated exporters, compa- Despite the fact the cooperatives functioned well because the coop- nies that buy coffee from the grow- are supposed to be private enter- eratives were monopsony buyers, ers, process it in their own facto- prises, they often receive implicit eliminating the prospect of grower ries, and export it themselves. assistance through public inter- default. However, most coopera- Since the mid-1990s many private vention. For example, two coopera- tives had to be bailed out, and so estates have undertaken exten- tives in the Kagera region entered viewed from a marginal cost pric- sive rehabilitation, including re- the 2000/01 coffee season with fi- ing point of view, the input finance planting. Some nationalized es- nancial difficulties, in part be- system was not sustainable. The tates have been privatized (see cause they had bought coffee from reforms broke the link between box). farmers and were holding it as The Kilimanjaro Coffee Estates positive outcome. Production and yields of coffee declined rapidly and sharply, however. In less than Coffee estates in Tanzania were established dur- a decade all but a few estates were abandoned, pro- ing the colonial period, some as early as the 1920s. ducing no coffee at all. Only one primary society Their land-ownership arrangements were freehold managed to repay its debt to the treasury. titles obtained from German settlers. Shortly af- Shortly after the 1993/94 coffee sector reforms, ter independence all freehold titles were converted the only former estate owner who was living in into 99-year free of charge leases from the gov- the area negotiated and subsequently obtained a ernment. During the late 1960s coffee estates ac- 30-year lease for his former estate, which at the counted for a fourth of the country's coffee output, time was owned and "managed" by a primary soci- and by many accounts they produced the country's ety. Despite the fact that the estate was producing best coffee, commanding a high premium in the no coffee at all, within three years it was fully re- world market. The success, however, was short- habilitated and soon achieving pre-1973 yields. lived. Other investors followed suit--none of them origi- On October 23, 1973, the Government of Tanza- nal estate owners. About 20 coffee estates have nia summoned all coffee estate owners of the been leased to new investors, all of which have Kilimanjaro district whose estates were greater been rehabilitated. The typical arrangement is a than 50 acres and informed them that as of the 30-year lease with the annual rental fee ranging next day their estates, including land, buildings, from $30 to $150 per acre, adjusted for inflation. machinery, and bank accounts, would be pur- The rental fee depends on the condition of the es- chased by the nearest primary societies (members tate as well as the time the lease was signed. Con- of the Kilimanjaro Native Cooperative Union) at tracts signed recently fetched lower fees because "full and fair compensation." Within the next six of low coffee prices. One obstacle in leasing the months, all estate owners (with one exception) had rest of the abandoned estates has been the fact left their estates. Negotiations between the pri- that they are owned by more than one primary mary societies and the former estate owners on society. There have been disagreements within purchase price were drawn-out. The "negotiated" management of the societies on the terms of the price turned out to be less than a third of the mar- contracts and on how to share the revenue from ket value of the estates, and by the time compen- the rental fee. sation began (eight years later in six-month in- Some preliminary calculations indicate that, on stallments), inflation had halved the value of the average, each acre of rehabilitated estate creates sales price. The primary societies in charge of the equivalent of two full-time minimum wage jobs managing the estates borrowed funds from the for unskilled workers (1,000 Tsh a day), while the treasury in order to compensate the former estate annual direct transfer to the local economy ranges owners. between $500 and $1,000 an acre. That includes It is not clear why only the Kilimanjaro coffee wages, rents paid to primary societies, and pur- estates were nationalized. It appears that this was chase and repair of machinery, irrigation, trans- to be the first step toward nationalization of all cof- port equipment, and other expenses. fee estates, if the "Kilimanjaro-experiment" had a Uncertainties in the coffee sec- world prices collapsed. To remain government instructed the Coffee tor were exacerbated by the "one in business, the cooperatives ob- Board to revoke the buying licenses license regulation" issued by the tained a government-guaranteed of the private traders without com- Coffee Board just three days before loan from the Cooperative Rural pensation or right to appeal, effec- the official start of the 2002/03 Development Bank. To ensure tively handing a monopsony to the coffee buying season in the West- that the loan would be repaid, the cooperatives. ern coffee zone. The regulation lim- ited applicants for private coffee Recommendations · The Coffee Board should take buying, coffee processing, or green full responsibility for collecting, coffee export licenses to just one If the coffee sector is to reach its monitoring, and improving the of these licenses, with an excep- full potential, priority should be quality of all coffee statistics, es- tion for the combination of private given to the following. pecially on production, exports, and coffee buying and coffee process- · Taxes should be substantially export prices, which are currently ing license. Anyone holding a reduced, the tax code simplified, unacceptable. That will help the green export license who applied and taxes should be consolidated, public sector take the proper policy for the other two licenses would rationalized and made uniform actions and the private sector to have their green export license across all exports. That will intro- make correct investment deci- suspended. Applications had to be duce a more equitable distribution sions. submitted immediately, to be ready of the tax burden and induce a sup- · The power of the Coffee Board for the start of the coffee buying ply response in the coffee sector. and the ministries must be sub- season. These regulations were · The Coffee Board's licensing stantially reduced and their re- clearly designed to help the coop- procedures should be re-examined. spective roles clearly defined. Se- eratives increase their market Licenses should be suspended only lection of the Coffee Board's mana- share at the expense of private in accordance with the regulations gerial team should be the traders. and not in response to requests by industry's job. This will increase All coffee produced in Tanzania the cooperatives or the Ministries. the effectiveness of the decision- for export must be marketed Licenses should be renewed auto- making process, which ultimately through the auction. The manda- matically and subject to a modest should reflect the needs of the in- tory nature of the auction in- fee to cover administrative costs dustry, not the wishes of various creases marketing costs enor- and not treated as a tax tool. That policy actors. mously. Elimination of this re- will increase the efficiency of the · The legal and regulatory frame- quirement will enable coffee trad- sector and create a more predict- work should facilitate the transfer ers to market Tanzanian coffee able investment climate. of the nationalized estates to pri- through neighboring countries, · The coffee auction should be vate individuals so that their full especially Kenya and Uganda. Both voluntary. This will substantially potential can be realized. countries enjoy considerable pre- reduce the costs of vertically inte- mia for their coffee (robusta and grated exporters and estates that mild arabica, respectively), and have the capacity to market the This article was prepared by given the small size of the Tanza- coffee themselves. It will also en- John Baffes, Senior Economist, nian crop such trade arrange- hance cross-border trade so that Development Prospects Group, ments should benefit smallholders. Tanzanian coffee growers can en- jbaffes@worldbank.org. This paper Making the arguments in favor of joy the robusta and mild arabica is an extract of a full text document, regional trade integration even premia enjoyed by their counter- Tanzania's Coffee Sector: stronger is the fact that a substan- parts in Uganda and Kenya. Constraints and Challenges in tial portion of Tanzanian robusta a Global Environment, Africa is already exported to Uganda. Region Working Paper no. 56, June 2003, www.worldbank.org/afr/ wps/wp56/htm. For more informa- tion, please e-mail Jbaffes@worldbank.org