Direct payment a game changer in coffee sector

Statutorily, the DSS provider is competitively selected by the NCE and approved by the Capital Markets Authority through issuance of a licence. The genesis of DSS was a presidential directive to the National Taskforce on Coffee Reforms to recommend a policy action, that would address the unpredictability, and delay of coffee farmers’ proceeds upon settlement by buyers.

Under previous regulatory framework, coffee farmers delivered cherries to the cooperative societies for processing to parchments for a fee, the parchment was then milled to green coffee by a private coffee mill, where sorting and grading was done.

Upon grading, the marketing agents took custody of the green beans and exercised their exclusive rights of selling the graded green coffee to buyers through NCE.

Further research showed that coffee farmers paid for all service provided along the value chain. Moreover, it was established that marketing agents had a conflict of commitment, in that they would take custody of coffee that they did not own, and the system entrusted them to receive coffee proceeds first on behalf of the farmers.

Read: Why Africa’s coffee sub-sector needs reforms

Above all, the buyers yielded tremendous influence over the cooperative societies through millering and marketing, where they were integrated vertically.

This symbiotic relationship manifested to opaqueness and trading insider problems, which compromised efficient price discovery and transaction settlement on one hand.

On the other, upon settlement by coffee buyers, the coffee proceeds were disbursed to marketing agents, who first paid themselves and then distributed the balance to third parties, depending on their interest, including coffee farmers who were paid last.

Although proprietary interest over coffee belongs to the farmers, their payment was always delayed to an average of six to eight months. It is the failure to prioritise this payment and the outrage it sparked that caught the President's attention.

The President appointed the National Taskforce on Coffee Reforms to conduct rigorous value chain analysis and recommend a turn-around policy of the sector within the purview of Constitution.

First, granted that coffee proprietary interests belong to the farmer, these interests are recognised and protected by the Constitution. Inferably, the interest of coffee farmers along the value chain trumps any other, until those interests are legally relinquished upon exchange and settlement.

Secondly, as a government agent, the Taskforce was bound by national values specifically equity, non-discrimination, transparency, accountability among others.

In nutshell, the conceptualisation of DSS predicated on recognition and protection of farmers’ proprietary interest. In addition, implementation of DSS was to be bound by the constitutional prescribed national values especially public participation, equity and transparency.

Operationalisation by the DSS provider was also anchored on the constitutional principles of consumer protection, which embodies promotion of competition. It is on this basis that the Taskforce recommended competitive selection process of DSS provider, which must be regulated commercial bank.

Since the inception of its operations on August 15, 2023, the system has significantly reduced the delay of payments to farmers, enhanced transparency and expanded the financial inclusion.

Notwithstanding teething operational challenges that are still lingering on, the system has facilitated 69 sales at approximately $466.36 million (Sh60.36 billion), with over a million-customer base of farmers through co-operatives. What a milestone?

While breakthrough has been euphoric and exuberant, the operations of the DSS has raised public policy concerns. It is being alleged that the current DSS provider enjoy monopolistic dominance.

For this allegation to hold legally, one needs to demonstrate two things. First, to prove that the selection criteria for licensing DSS providers is a barrier to entry. Second, to demonstrate existence of abuse of the monopolistic power.

Read: Marketing imperative in coffee reforms

Another operation issue that is being hotly discussed in the public discourses is the viability of paying small-scale farmers directly within five days after settlement as statutorily prescribed.

This problem applies to small-scale farmers who collectively process their coffee, that varies in quality and volume through a cooperative framework. The optimal payment frequency will depend on transaction costs.

In conclusion, the merits of criticism of DSS notwithstanding, they are frivolous in the broader scheme of global coffee value chain. Kenya’s share globally is approximately 0.03 percent out of $500 billion global value.

This pittance is not worthy to fight over. We must all collectively unite and push for policy toward retail market of value addition and consumption. That is where money is.

The writer is a public policy analyst at the Kenya Institute for Public Policy Research and Analysis (Kippra).