Assessment of the impact of the Kenya Government fertilizer subsidy on the performance of domestic private sector fertilizer trade

doi:10.21203/rs.3.rs-3914427/v1

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Research Article

Assessment of the impact of the Kenya Government fertilizer subsidy on the performance of domestic private sector fertilizer trade

https://doi.org/10.21203/rs.3.rs-3914427/v1

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Introduction

Fertilizer subsidy was reinstated by the Kenyan government in 2022 to cushion farmers against increasing fertilizer prices on the domestic market caused by shocks to the global fertilizer supply chain. This study assessed the efficiency and effectiveness of the distribution process; the impact of the fertilizer subsidy on the domestic private sector trade; and proposed optional delivery mechanisms for better outcomes to actors in fertilizer supply chain.

Methodology

The study used mixed method approaches; secondary data, qualitative survey of key stakeholders and quantitative survey of beneficiaries.

Results

Findings show that the private sector and the government incurred about the same cost of delivering the fertilizer to last-mile agro-dealer. The absorption of the subsidised fertilizer increased over time especially when the fertiliser price reduced to Ksh 2,500 per 50kg bag. However, farmers faced challenges in accessing the fertiliser such as long distances and increased transport costs to the nearest NCPB depots, late delivery of subsidised fertilizer; mismatch between fertilizer types demanded by farmers. Distribution of the subsidised fertilizer was skewed towards the high potential maize growing region of the country. Certain farmers received subsidized fertilizer from both the NFSP and the county, while other farmers received did not receive since the NFSP and the county farmer database were not combined resulting to uneven distribution of fertiliser.

Conclusions

While all stakeholders viewed the decision to subsidise fertilizer favourably, the model used was suboptimal. The discounted fertiliser is not easily accessible because to high transportation costs, long queues at collection depots, and a delayed process during fertiliser pickup. To enhance access, the government should incorporate the private sector in distributing subsidised fertilizer. The NCPB storage facilities should be centrally positioned to facilitate farmers' quick access to subsidised fertiliser. Timely fertilizer delivery, proper fertilizer distribution, and subsidy predictability are essential for achieving the goal of increased productivity.

Agricultural Economics & Policy

Fertiliser subsidy

Distribution costs

Private sector

Effect

Farmers

Input Market

In the face of declining soil fertility and a growing population, raising agricultural productivity in Sub-Sahara Africa (SSA) remains a major challenge. One key strategy undertaken by several governments to raise productivity is the provision of subsidies to improve access to inputs, such as improved seeds and fertilizers by smallholder farmers, who lack the means to purchase at market prices. In the 1990s to mid-2000s, such input subsidy programs were phased due to structural adjustment policies adopted by many SSA countries. Besides, there was also diminished focus on such programs as they were deemed to have weak impact on productivity, constrained national budgets while interfering with private sector investments (Kherallah, et al., 2002; Morris, et al., 2007; World Bank, 2007).

The Maputo Declaration for Africa in 2003, and subsequent Malabo recommitment in 2014, called for an increase in public agriculture expenditures to be at least 10% of national budgets and to be channelled towards enhanced agricultural growth in SSA countries (African Union, 2014). Following this declaration and the subsequent global spike in food prices in 2007/08, there was a resurgence in Input Subsidy Programs (ISPs). However, the resurgence of ISPs involved the re-introduction market-friendly approaches that encouraged private sector participation (Jayne & Rashid, 2013; Morris, et al., 2007). As the ISPs have expanded throughout SSA in recent years, the rising cost expenditures with a significant burden on national budgets, coupled with inefficiencies in operations have caused serious concerns towards continuance of ISPs in many countries (Takeshima & Nkonya, 2014; Jayne, et al., 2013; Jayne, et al., 2018). Consequently, several countries have adopted different designs of delivery and mechanisms towards implementation of such ‘smart ISPs’ to maximize operational efficiency and impact on crop yields, income and agricultural growth opportunities (Sibande, et al., 2017; Nkhoma, 2018; Mason, et al., 2017).

Since the 1990s, the Kenyan government has implemented several policies and regulatory reforms aimed at improving fertilizer market development and infrastructure through increased private sector participation and investments. Besides, the government has been implementing ISPs that target resource-poor farmers and provide benefits from improved agri-inputs use on a wider scale. Past initiatives include the fertilizer cost reduction initiative in 2008, where the government procured fertilizer in bulk and incorporated into the National Cereals and Produce Board (NCPB) interventions, to import and distribute large quantities through its network of depots. The government also implemented the general fertilizer subsidy program, the National Accerelated Agricultural Inputs Access Program (NAAIAP) and piloted an E-voucher program. Through these programs, the Kenyan government reached nearly 3.7 million farmers, distributing around 1,106,030 MT of fertilizers from 2008 to 2018.

The general fertilizer subsidy cost the government of Kenya an estimated Kshs 29.6 billion, over a period of 9 years, with an annual budget estimated at around Kshs 3.1 billion ~ US$310 million (Fig. 1).

Several country-level or cross-country-level assessments have been undertaken to evaluate the effectiveness of input or smart subsidy designs and delivery mechanisms in SSA. These studies have documented the principles behind each of these programs, their constraints and impacts at both micro and macro economy levels. Such studies also have provided valuable insights in terms of alternative strategies to improve the existing system and policies and design required to improve the performance of ISPs in meeting the overall objectives (Druilhe & Barreiro-Hurlé, 2012; Wanzala-Mlobela, et al., 2013; Jayne & Rashid, 2013; Jayne, et al., 2018; Smale & Theriault, 2019). Among the SSA countries, Kenya has been described as a success story in adopting and implementing fertilizer sector reforms, with positive impacts on crop yields, input use and adoption, farm incomes and improved market participation – in terms of access to input supplies, increased private sector participation etc., (Sheahan, et al., 2016).

In 2018, the Kenya Government scrapped the general fertilizer subsisdy and replaced it with a ‘smart subsidy’ the National Value Chain Support Program (NVCSP) popularly known as the E-voucher program in 2020. However, in 2022, the government reintroduced the general fertilizer subsidy in 2022 short rains season following the skyrocketing fertilizer prices in the domestic market due to the global fertilizer supply chain shocks triggered by the Covid-19 pandemic and exacerbated by the Russian war in Ukraine. The stated objective of the fertilizer subsidy, which was at 50% of the market price, was to make fertilizer affordable to a broad base of farmers for agricultural production and subsequently food security in the country.

In this context, the assessment was undertaken to contribute to the existing literature, with significant and practical insights to policy makers and decision makers in the Government to understand the efficiency of the general subsidy systems and motivate the choice of cost-effective mechanisms, subsidy models that expand coverage and reach. In addition, the study will help to reduce the subsidy burden on the government expenditure, while at the same time not adversely affecting crop yields and farm incomes. Therefore, this study takes an in-depth assessment of the general fertilizer subsidy program and its impact on stakeholders at different levels of the fertilizer value chain, including farmers, importers, manufacturers, private sector blenders, distributors, retailers and government functionaries.

The overarching goal of this study is to inform policy decisions that will deliver appropriate, affordable and adequate fertilizers to farmers in a timely manner. Therefore, the objectives of the study are to:

i. Assess the efficiency and effectiveness of the distribution process identify any gaps or challenges and propose recommendations for improvement

Assess the efficiency of the fertilizer distribution process to gain insights into whether the current system is functioning optimally, identify areas for improvements to enhance efficiency, and evaluate alternative systems. The aim is to understand the efficiency of the distribution process to ensure that subsidized fertilizer reaches the intended beneficiaries in a timely manner.
Evaluate the effectiveness of the fertilizer distribution process to enable stakeholders to determine if adjustments or alternative strategies are needed to achieve the desired impact.
Identify gaps and challenges in the distribution process such as logistical issues, delays, leakages, or other factors that hinder the smooth and efficient delivery of subsidized fertilizer and make recommendations for ensuring that the distribution system operates effectively.

ii. Assess the impact that the general fertilizer subsidy may have on the activities of the domestic private sector trade in fertilizer, including manufacturing, importation, distribution and retailing; and

iii. Propose optional delivery mechanisms that could produce better outcomes for fertilizer supply chain actors, including farmers.

The scope of the study includes the estimation of the costs of the current model of subsidy delivery. This cost will be compared with what it costs the private sector to distribute their fertilizer to the last mile. The costs from these two models will be compared with the costs of models where the government collaborates with the private sector to deliver the subsidy to the last-mile. The study also evaluated the efficiency in the procurement of fertilizer under alternative models and explored the opportunity costs involved in limiting the type of fertilizer covered in the current subsidy. Based on the evidence generated, the study made recommendations to the government regarding options for making fertilizer subsidy more effective and efficient in delivering value for farmers, actors in private sector fertilizer trade, the government as well as the public.

The study utilised mixed method approaches in pursuit of the objectives of the study. Mixed methods were preferred, as it will allowed for a combination of methods and tools to be used together. First, a comprehensive desktop review of literature and secondary data were undertaken. Literature including reports, journal articles and other publications, and secondary data from reputable institutions will be collected, evaluated for reliability and used to develop the evolution of fertilizer subsidy programs.

Publicly available datasets and secondary data were accessed and used construct a value chain map for the fertilizer value chain. This was essential in developing an analysis on the cost, and efficiency and effectiveness of the delivery systems used in the subsidy model and form a basis for comparison with the private sector value chain.

To understand the complex phenomenon under investigation, a qualitative approach was adopted. For qualitative survey, the Ministry technocrats, industry players, regulators, KNTC, NCPB, AFA, FAK were interviewed to obtain information and perceptions of the fertilizer subsidy. Further, a qualitative and quantitative survey of key markets were undertaken where distributors and retailers involved in the fertilizer value chain were interviewed.

Finally, a quantitative survey with beneficiaries/farmers were carried out to ascertain the costs, efficiency and effectiveness of the last-mile delivery systems.

Qualitative data was coded and analysed using MAXDQA. Quantitative data was analysed using Ms Excel and Stata.

3.1. Evolution of fertilizer subsidy programs

Input subsidy programs were eliminated during the economic structural adjustment program during the late 1990s and early 2000s in Kenya, as they were in many other countries in the region. However, at the turn of the century, these subsidy programmes began to be revived. In Kenya, some on the triggers to the revival of these programs were low use of fertilizer that contributed to low productivity and the rapid fertiliser price increases following the oil price shock of 2008. We highlight the most important fertiliser-related subsidy programs.

In 2007, Kenya launched the National Accelerated Agricultural Inputs Access Programme (NAAIAP) to encourage fertiliser use (especially among smallholder farmers). NAAIAP was a smart subsidy program designed to increase smallholder farmers' access to seeds and fertilizer and to make these essential inputs more affordable. In this program, smallholders with less than an acre of land were the primary targets. NAAIAP was considered to be ‘smart’ due to its specific objectives and targeting of smallholders and utilisation of agro-dealers in distributing inputs packets i.e., seed and fertilizer to farmers. The objectives were to promote learning on use of fertilizer among ‘resource-constrained’ farmers. The program was graduated, in that farmers would be eased out of the program having received full subsidy in the first year, a partial subsidy in the subsequent year and exit the program in the third year. Initially, the government claimed that fertilizer consumption increased among smallholders leading to increased productivity and access to fertilizer (Otieno, 2012). However, later studies showed that the program was able to enhance productivity and reduce poverty in rural areas (Mason, et al., 2017), however, the targeting was not efficient as desired in that the vouchers were not necessarily distributed to ‘resource-poor’ households (Sheahan, et al., 2014).

Due to a significant increase in world oil prices in 2008, fertilizer prices tripled. A spike in fertilizer price because of the oil price shock also caused food prices to rise. Popular fertilizer product like Di-Ammonium Phosphate (DAP) increased in price from Ksh 2,000 per 50 kg bag in 2007 to Ksh 6,000 in 2008. In response, the government reintroduced the general fertiliser subsidy program, known as the Fertilizer Price Stabilization Plan (FPSP) and later renamed as the National Fertilizer Subsidy Programme (NFSP). The Ministry of Agriculture through the National Cereals and Produce Board (NCPB) implemented the NFSP. Initially, the NCPB imported fertiliser and then settled the import claims with the Ministry of Agriculture; subsequently, the ministry contracted suppliers who delivered directly to NCPB depots. Farmers then accessed the subsidised fertiliser through the NCPB depots. The subsidy programme faced challenges, including procurement delays due to budgetary issues, long distances from household locations to depots, tedious access processes, and major disruptions to private-sector distribution plans.

In response to feedback about the inefficiencies of the NFSP, the Government piloted the electronic voucher (E-voucher) system in 2014/2015. The E-voucher subsidy programme built on the NAAIAP program, which involved agro-dealers, often geographically closer to farmers than the NCPB depots, and targeted farmers in specific geographies who satisfied the recruitment criteria. This programme allowed the private sector dealers to operate without the prior disruptions caused by NFSP.

NAAIAP, which targeted vulnerable households continued to be implemented parallel to the NFSP. In 2013, County governments were established and some of the Counties established parallel fertilizer subsidy programs implemented during the same period. Besides, some of the national agricultural programs such as the Kenya Cereal Enhancement Programme Climate Resilient Agricultural Livelihoods Window (KCEP-CRAL) had fertilizer subsidy components that were implemented in selected counties.

The NFSP received critique due to its inefficiencies in implementation. First, the program was geographically skewed to favour specific geographies and crowded out private sector fertilizer markets (Makau, et al., 2016). Besides, the program had a huge public expenditure burden, had issues on the quality of fertilizer delivered and was delivered late after the season had started (World Bank, 2019). In 2018, the government discontinued the NFSP and replaced it with the National Value Chain Support Programme (NVSP), commonly called the E-voucher programme. The E-voucher programme was first rolled out in 12 counties in 2020 and used electronic vouchers to manage the distribution of subsidised inputs. The NVSP differed in many aspects from the NSFP:

The NVSP leveraged mobile phone penetration across the country,

It required the registration of both farmers and agro-dealers, with agro-dealers assigned to specific catchment areas,

Agro-dealers under the programme sold inputs at subsidised prices, and

Commercial banks participated as fund managers to settle the subsidy amount immediately once a sale was made.

The program was deemed effective because farmers received vouchers, they could redeem at a suitable agro-dealer in their communities. A farmer would pay 60% of the cost of a bundle of inputs (seed, fertilizer, and agrochemicals); in the first year, the government provided a 40% subsidy to the agro-dealers through the contracted commercial banks. The voucher's validity was two weeks. In the second year, the subsidy amount would be cut to 30%, and in the third year, it would be cut to 10%. After the third year, the farmer would continue to buy inputs at market prices after realizing the value of utilizing the bundle of inputs during the subsidy period. County agricultural staff were essential to the program, and they took part in farmer registration activities.

Four value chains—coffee, rice, maize, and Irish potatoes—were covered in the pilot phase. Following the first year, two additional value chains—sorghum and green grams—were added, bringing the total number of counties taking part in the program to 28. Due to a low response from agro-dealers, nine additional counties that were targeted for the second phase rollout did not participate. The targeting criteria for farmers was also changed in the program, moving from those with one acre to those with five acres or less. As expected, the input package varied by value chain. The extensive farmer registration process used to help with the selection of eligible farmers was the core component of the NVSP's success. Additionally, the private sector and county governments were involved in the program's implementation.

Despite the initial success, the programme was not scaled up further. In 2021, fertiliser prices started to rise due to the supply chain constraints from the COVID pandemic period. The price hike escalated exponentially again in early 2022 following Russia’s invasion of Ukraine. As shown in Fig. 2, the crisis in 2022 closely resembled the price shock in 2008 in terms of magnitude.

A government administration came into power in August 2022 and immediately reinstated the general fertiliser subsidy to cushion farmers from the price increases. However, the reinstating of the NFSP was done at the expense of the NVSP, whose funding was significantly reduced from Ksh2 billion to Ksh 500 million in the 2023/24 financial year.

3.2. Changes made to the structure of the NFSP

The previous program imposed a very high transaction costs on farmers, since registration was done manually. Farmers had to travel to the nearest agricultural office to collect the registration forms, have the forms endorsed by the agricultural officer before taking the forms to the nearest NCPB depot. Farmers would then make another trip to the NCPB depot to collect subsidised fertilizer. The distances were long. On average, the nearest NCPB store was about 24 Km from households based on a nationally representative survey, while agricultural offices were about 8 Km away (Table 1).

Table 1

Mean Distance (Km) to Agricultural Service Providers
	Fertilizer Seller	Extension Advice	Nearest NCPB Depot
Coastal Lowlands	14.9	11.5	39.4
Lower Highlands	3.5	6.5	23.2
Lower Midlands 1–2	2.7	5.3	18.4
Lower Midlands 3–6	6.7	11.1	31.7
Upper Highlands	3.6	7.3	23.7
Upper Midlands 0–1	2.2	5.3	16.6
Upper Midlands 2–6	3.5	7.3	24.0
Overall	4.3	7.6	24.2
Source: 2014 TAPRA II rural household survey

To ease the registration burden, the government registered farmers and the database generated was utilised to provide farmers with vouchers through SMS to access the subsidy. The quantity of fertiliser allocated was determined by the farmer's declared cropland, the crop type(s) to be cultivated, calculated per the recommended application rate by the Kenya Agricultural and Livestock Research Organization (KALRO). For the short rains of 2022 and long rains of 2023, farmers bought fertiliser at a subsidised maximum price of Ksh 3,500 per 50kg bag. However, for the short rains in 2023, the price was lowered to Ksh 2,500 per 50 kg bag.

The other significant change was the logistics involved in the sourcing of fertilizer. This time, the Kenya National Trading Corporation (KNTC) was charged with the mandate of sourcing for fertilizer. KNTC then supplied the NCPB for last-mile distribution through its depots. In turn, NCPB was able to charge KNTC for storage and distribution costs. KNTC sourced some of the fertilizer through two requalified importers, purchased some blends locally and imported some of the fertilizer itself.

The final change was the fertiliser types on offer under NFSP. While previously, DAP and CAN were the dominant types, this time, NPKs were the dominant type of fertilizer distributed. The key reason in the shift of the fertilizer type was rising soil acidity in many regions of the country. Prolonged use of DAP fertilizer without other soil fertility improvement practices has been blamed for this situation. As such, DAP was omitted among the fertilizer types distributed in the current program.

3.3. Other input subsidy programmes

Other input subsidy programs are implemented by donor-funded programs, development partner programs, county governments and civil society programs. Donor funded programs include the KCEP-CRAL, which is an European Union Government of Kenya Funded program through the International Fund for Agricultural Development. Others include programs ran by AGRA, WFP, GIZ. However, the volumes and subsidies offered through these programs are significantly small.

County governments have launched subsidy programs, with other complementing the efforts by the national government by subsidising transport instead of an additional parallel program. In the counties visited, County input subsidy programs were implemented in Kakamega, Bungoma, Nyandarua Makueni and Taita Taveta counties. These programs were designed to target the most vulnerable farm households. In Bungoma and Kakamega counties, beneficiaries received planting fertilizers, top-dress fertilizers, and seeds. Additionally, the Kakamega county government subsidized farm mechanization (ploughing) and fish feeds for farmers engaged in fish farming. Both the Kakamega and Bungoma county governments have established monitoring and evaluation mechanisms to assess input distribution and farm performance among beneficiary households.

In Nyandarua, the county government provides fertilizer subsidy occasionally. The county also provides subsidy on avocado seedlings, pyrethrum, strawberry, maize and vegetables seeds. In Makueni, the county government provides transport subsidy for a track of manure from Kajiado County. The farmer only pays the purchase price. Taita Taveta county government also provide full subsidy on fertilizer to vulnerable households, but this is done only on request by a member of the county assembly.

Other subsidy programs that exist in various counties include KCEP-CRAL and KCDMS loyalty programme. The KCEP-CRAL brings together a number of partners (public and private organisations) to implement various components of the project based on their areas of expertise. Beneficiary farmers are provided with a bundle of inputs (seeds, fertilizer and agrochemicals) through the nearest agro-dealer and pays 40% of the cost, the rest is paid by the programme.

The KCDMS program was developed with the objective of enhancing agricultural productivity and alleviating poverty and malnutrition in Kenya through the promotion of competitive, inclusive, and resilient market systems within the horticulture and dairy sectors. The program collaborates with private sector entities to facilitate the transformation of agricultural market systems, establish a conducive environment for business growth, and advocate for government-level reforms that promote investment. As part of the KCDMS initiative, a loyalty program was implemented, wherein vulnerable farmers were connected with selected agro-dealers. Under this program, farmers were entitled to a 20% discount on every purchase of fertilizer, which they could subsequently redeem for another agricultural input within the same store. The program was implement in in Kitui, Makueni, Taita Taveta, Homa Bay, Migori, Kisii, Kisumu, Siaya, Kakamega, Bungoma, Busia and Vihiga counties.

4.1. Fertilizer value chain map

Figure 3 present the fertilizer value chain map adopted from Wolfe (2023). Fertilizer in Kenya is largely imported. Once fertilizer has landed, we identify four major pathways through which fertilizer gets to smallholder farmers. First, we have the private sector fertilizer value chain. This is the most developed chain, and a major pathway through which fertilizer gets to farmers. Kenya has a network of over 30,000 distributors and agro-dealers who undertake last-mile delivery of fertilizer. The agro-dealers are dealers for some of the manufacturers, however, majority are independent SMEs. The pathway for this chain flows from importer to manufacturer to regional distributors to local agro-dealers then to farmers.

The second pathway is specialised to take advantage of farmer organisations. The Kenya Tea Development Agency (KTDA) has a network of factories with an estimated 700,000 smallholder tea farmers. As tea require one type of fertilizer, KTDA through one of its subsidiary companies has been undertaking bulk procurement of fertilizer and distributing the fertilizer to smallholder farmers through the factories. Each factory then decides on the last mile distribution arrangement - farmers pick fertilizer either from the factory office or through the tea buying centres. Due to the economies of scale realised by this method, a number of tea estates joined the scheme and now order their fertilizer through KTDA. A newer entrant to this arrangement is Tupande (formerly One Acre Fund). Starting as an organisation to help smallholder farmers’ access fertilizer, Tupande is able to leverage on its global business to procure fertilizer in bulk and distribute to smallholders. Tupande has now established its own agro-dealer shops throughout the country, which are the main locus of distribution to farmers. The key benefit of this pathway is that farmers can access fertilizer at the last mile either at lower than market prices or on credit.

The other two pathways are the subsidy systems described in section two. The NFSP that utilises KNTC and NCPB to get fertilizers to farmers and the County system that utilises ward level distribution centres.

4.2. Fertilizer imports and domestic fertilizer prices

Fertilizer imports peaked in 2020 over the past five years as seen in Fig. 3. The peak in 2020 coincided with the pandemic period where the majority of the folk who lost employment in the formal sector took up farming during the same time. However, going into 2021, fertilizer prices started to rise following cut back in global production of fertilizer and constraints in global supply chains. Prices skyrocket in 2023, due to the Russian - Ukraine war which started in February 2022. As prices rose, demand contracted by 20% before declining further in 2023 by 8%.

Figure 4 shows the trends in local fertilizer prices by fertilizer type. Urea, followed by DAP recorded the highest price increase among the commonly used fertilizers. The prices in 2023 have come down in global markets (Fig. 2); however, local domestic prices have not come down by the same margin.

A number of factors can explain the sticky fertilizer prices. First, the exchange rate in 2023 worsened, depreciating by almost 40% in the first half year of 2023. The implication being that any new imports were likely to be expensive. Second, when the subsidy was introduced in 2022, there is potential displacement of private sector markets. If agro-dealers were unable to sell, it means that they are still trying to off load their stocks which were imported at higher prices, and hence the high fertilizer prices.

4.3. Analysis of distribution costs

Figure 5 shows the distribution costs per bag of commercial fertilizer ex-CIF price to the last mile (we use Kitale as a market to show the trend in per unit costs of distribution). The cost components include clearing, bagging, warehousing, capital and handling cost and distribution to agro-dealers. Handling and distribution costs include road transport, storage, loading/offloading and security. Over the past five years, delivering fertiliser to the last mile have risen. In 2023, the total cost of delivering to last-mile agro-dealers in Kitale was Ksh1,289 per 50kg bag compared to Ksh 840 in 2019. Three components changed significantly between 2020 and 2023. The cost of capital, the costs of clearing and costs for distribution and handling. The increases in the cost of capital and cost of clearing can be explained by the rising global costs of fertilizer and declining volumes leading to higher per unit costs. The costs for handling and distribution can be attributed to the rising fuel prices and lower volumes moved resulting again in higher per unit costs.

Table 2 shows the cost build up to the last mile including the price the farmer can expect to pay in 2023. The Ex-warehouse price includes the price for bagging, warehousing and the cost of capital. Using the same market, Table 1 shows the distributor and retailer fertilizer prices per bag by fertilizer types.

Table 2

Cost build-up (Ex-warehouse-private sector)
Fertilizer type		Distributor			Last-mile agro-dealer
Fertilizer type	Ex-warehouse	Financing	Handling & distribution	Wholesale price	Handling/ distribution/ financing	Landing cost	Retail price
CAN	4,750	342	321	5,413	55	5,468	5,520
UREA	4,700	342	321	5,363	55	5,418	5,683
NPK	4,500	342	321	5,163	55	5,218	5,515
Yara Microp	4,650	342	321	5,313	55	5,368	5,650
NPK 23:23:0	4,785	342	321	5,448	55	5,503	5,715
Kynomaizec	4,500	342	321	5,163	55	5,218	5,468
Fomi	4,700	342	321	5,363	55	5,418	5,588
Average				5,318		5,373	5,591

The average price per 50 Kg bag would be Ksh 5,318, while retailing at Ksh 5,591. These landed prices are a useful indicator to check if the subsidy fertilizer landed at similar costs. Table 3 shows the costs build up for the subsidised fertilizer under the NFSP. KNTC paid Ksh 750 per bag to NCPB as costs for logistics, storage and handling. The landed price at the NCPB depot then average Ksh 5,405 per bag. The distribution costs incurred under the NFSP program did not differ very much from the costs incurred by the private sector.

Table 3

Cost build-up-NFSP
Fertilizer type	Ex-warehouse	Handling & distribution	Landing cost at NCPB	Subsidy price	Actual costs incurred by farmers
CAN	4750	750	5,500	2,875	3,075
UREA	4700	750	5,450	3,500	3,700
NPK	4500	750	5,250	3,275	3,475
Yara Microp	4650	750	5,400	3,500	3,700
NPK 23:23:0	4785	750	5,535	3,500	3,700
Kynomaizec	4500	750	5,250	3,500	3,700
Fomi	4700	750	5,450	3,500	3,700
Average			5,405	3,379	3,579

If we assume that the costs incurred by the private sector were high due to higher per unit costs in a year when they moved lower volumes, and costs such as costs of fuel had significantly increased, then we simulate the costs shown in Table 2 using a year when they moved more volumes resulting to lower per unit costs. We achieve this by using 2019 logistics figures and present the results in Table 4.

Table 4

Simulated cost build-up (Ex-warehouse-private sector)
Fertilizer type		Distributor			Last-mile agro-dealer
Fertilizer type	Ex-warehouse	Financing	Handling & distribution	Wholesale price	Handling/ distribution/ financing	Landing cost	Retail price
CAN	4,750	159	259	5,168	44	5,212	5,261
UREA	4,700	159	259	5,118	44	5,162	5,403
NPK	4,500	159	259	4,918	44	4,962	5,229
Yara Microp	4,650	159	259	5,068	44	5,112	5,367
NPK 23:23:0	4,785	159	259	5,203	44	5,247	5,442
Kynomaizec	4,500	159	259	4,918	44	4,962	5,189
Fomi	4,700	159	259	5,118	44	5,162	5,319
Average				5,073		5,117	5,317

The landed costs at the last mile agro-dealer decline to Ksh 5,117 per bag. This suggests that the government can make savings by switching the model to a model that includes the private sector and save the about 5% of the cost of the program while maintaining the costs at which the government intended farmers to access fertilizer. However, as shown in Table 1, farmers are located far from NCPB stores, and the transaction costs is higher for farmers travelling longer distances to collect the fertilizer.

Table 5 shows the transport costs incurred by farmers by source and county. Among farmers who received subsidy, those in western Kenya, i.e., Bungoma and Trans Nzoia Counties had the lowest transport costs per bag, with those in Nyeri and Kirinyaga with the highest costs per bag. In interviews with farmers, counties such as Kakamega NCPB demonstrated flexibility by establishing distribution centres to enhance access by smallholder farmers. The county subsidy system has managed to get fertiliser closer to farmers by establishing ward distribution centres. However, the agro-dealer pathway remains the most efficient in terms of costs in distributing fertilizer to farmers.

Table 5

Farmer transport costs per bag to transport fertilizer from source and county
Counties	Cost (KES/50 kg bag)
Counties	NCPB	County Subsidy	Agro-dealer
Bungoma	100–200		50
Kakamega	100–350	70	50
Migori	200		100
Trans Nzoia	100–200		50
Narok	200–300		50
Nyandarua	200–400		100
Nyeri	300–400	100	100
Kirinyaga	300–400		50–100

The costs shown in Table 5 are consistent with the literature on the development of fertilizer retail industry. Utilising the private sector retail systems such as had been done through programs such as NAAIAP and NVCSP is likely to lead to lower public expenditures on the subsidy, while ensure private sector development.

4.4. Distribution and access to subsidised fertilizer

When the NFSP was launched in August 2022, the distribution was initially targeted to 12 counties. The 12 counties are also the major maize growing counties with a high number of NCPD depots. Figure 6 shows the distribution of fertilizer county by county and region. The top graph shows that the 12 counties targeted for the initial distribution received about 80% of the fertilizer for the fertilizer that had been distributed by July 2023. Uasin Gishu and Trans Nzoia Counties, the major maize growing counties, received the bulk of the subsidised fertilizer.

The distribution pattern in similar to the older version of the program. Makau et. al., (2016) found that majority of the subsidised fertilizer was distributed to the north rift and south rift regions (70%). Figure 6 confirms the same pattern (65%). As was in the earlier version of the program, the fertilizer became synonymous with maize, and was loosely referred to as the maize subsidy. In the current version, the government has changed the fertilizer types going to different regions. For instance, in Kirinyaga County, MOP and SA which are suitable for rice production were distributed. In Nyeri County, NPK fertilizer suitable for tea and coffee production was distributed. In Bungoma County, fertilizer that was suitable for maize and sugarcane was distributed. However, bulk of the fertilizer is still expected to be used for maize production.

Figure 7 shows the proportion of farmers who had received subsidised fertilizer over the short rains 2022 to the short rains 2023 based on agriculture sector surveys done by Central Bank of Kenya (CBK) on a monthly basis from July 2022. The aim of the surveys was to generate high frequency data to support the decision making by the monetary policy committee. Fertilizer access picked over time. In the short rains of August 2022, only 20% of farmers accessed the subsidy fertilizer. In the long rains of 2023, the numbers improved with about 43% of farmers reporting to have accessed the subsidised fertiliser. The biggest improvement was seen in the short rains of 2023, where by September 2023, the number of those accessing subsidised fertilizer had risen to 70%.

The NFSP targeted all farmers. The same dataset by the CBK shows that the large-scale farmers were the highest beneficiaries with over 80% of large-scale farmers reporting to have received the fertilizer subsidy Fig. 8. On the other hand, just about half of the smallholders interviewed had accessed the subsidised fertilizer.

The implication of the evidence from the CBK data is consistent with earlier studies on the NFSP and the findings highlighted earlier. Smallholder farmers requiring a few bags are expected to be indifferent when offered the choice between purchasing subsidised fertilizer at Ksh 3,500 and purchasing from an agro-dealer at Ksh 5,500. The cost to get the fertilizer to the farm narrows the cost saving. Coupled with other constraints faced such as delays in delivery to the depots, a farmer would decide to purchase from agro-dealers. However, when the government lowered the subsidised price to KSh 2,500 per bag, the absorption was expected to rise.

Figure 9 shows the fertilizer absorption between July and August 2023. With the reduced price, close to one million bags was purchased in August 2023.

4.5. Effect on private sector fertilizer sales

The model of subsidy fertilizer used was already shown to have an adverse effect on the private sector value chain. Figure 10 shows the trend established at the distributor level for the sample distributors in selected counties in this study. Consistent with the import volumes in Fig. 3, volumes handled by distributors had the biggest gain in 2020 when they rose by 32%. However, in 2023, the largest decline was registered (22%), although the figures are up to mid-year. The volumes moved in the short rain season are significantly lower and the high sales of subsidised fertiliser in the short rains of 2023 means that the distributor volumes are not expected to change significantly. Furthermore, the accumulation of closing stocks in 2023 suggests that the distributors are unlikely to purchase additional fertilizer.

Figure 11 shows the volumes handled by last mile agro-dealers. Last mile agro-dealer volumes were stable between 2020 and 2022, before declining by 34% in 2023. The sharp decline in 2023 can be attributed to the sharp increase in closing stocks in 2022.

Last mile agro-dealers are more sensitive-to-sensitive to shocks. For instance, we find that they reduce their volumes in 2020 due to the pandemic. The movement restrictions could have resulted in this reduction. In 2023, they did not expect farmers to increase purchases due to the fertilizer subsidy. In addition, they expressed that their volumes were affected by the decision to cut back NVCSP program, for which they had registered and stocked in reediness for the new season.

The uncertainty caused by the NFSP affects the decision to stock and both distributors and last-mile agro-dealers do not want to tie their capital in unmoving stock. Further, the effect on the distributors and agrodealers differed by region. In the counties such as Uasin Gishu, Kericho and Nakuru, the volumes declined by 77% for distributors and 88% for agro-dealers (Opiyo, et al., 2023). Bungoma (52%), Kirinyaga (53%) had the highest reduction in volumes handled. On the other hand, distributors in Migori, Narok, Makueni and Taita Taveta recorded increased volumes. It is important to highlight that the market share for these counties is low, and as seen in Fig. 6, the volumes of subsidised fertilizer distributed in these counties was not very high. The displacement of fertilizer sold through the private sector occurred in key markets where higher volumes of subsidised fertilizer was distributed.

4.6. Implication on farmers

According to KIIs and FGDs, most farmers procure fertiliser from agro-dealers due to proximity. Some farmers reported procuring fertiliser from Apollo, Tupande (formerly One Acre Fund), co-operatives, NGOs, county government and NCPB. The county government and national government (NCPB) offer fertiliser at subsidised prices which are lower than the private sectors retail price. Farmers in majority of the counties reported receiving the subsidised fertiliser late except for Bungoma who got the fertiliser at the right time.

Farmers received the NFSP voucher depending on the registered land acreage. There were some drawbacks in NFSP implementation in some study areas which include: some farmers did not receive the message from the National Fertilizer Subsidy program (NFSP) therefore missing the opportunity and opted for the fertiliser from the private agro-dealers and distributors. Farmers’ registration for NFSP was done late affecting the redeeming of the fertilizer. Unavailability of preferred fertilizer types at the NCPB and at the right time e.g., DAP was not available especially during planting season, for example, in Kirinyaga, the farmers were given the top-dressing fertiliser before the planting fertiliser instead of the vice versa. Some NCPB depots are crowded and has long queues, therefore, farmers spend three days before receiving the subsidised fertiliser increasing the costs such as spending nights away from home. Farmers travel for long distances to get the subsidised fertiliser hence incurring higher transport cost as shown in Table. The elderly and most vulnerable farmers may not have access to the subsidised fertiliser because they cannot meet the transportation cost. Two non-NCPB collection centres were established in Bungoma county to ease the congestion and to bring the subsidised fertiliser closer to the farmers.

Table 6

Average distances and costs to agro-dealers and NCPB collection points
County	Average distances travelled to agro-dealers (KM)	Average cost of transporting 50kg bag of fertiliser from agro-dealers (Kenya Shillings)	Average distances travelled to NCPB centres (KM)	Average cost of transporting 50kg bag of fertiliser from NCPB (Kenya Shillings)
Bungoma	5	50	15–20	100–200
Kakamega	2.5	100	15–20	100–350
Kirinyaga	2–4	50–100	7–30	100–300
Makueni	-	-	-	-
Migori	3	100	6–12	200–250
Narok	-	-	21–25	250
Nyandarua	5–8	100–200	11–46	200–400
Nyeri	2	100–200	10–40	300–400
Taita Taveta	-	-	-	-
Trans Nzoia	-	-	-	-

The expiry period of the code sent to farmers for the subsidy fertilizer is short and farmers are not able to get fertiliser after expiry date. The NCPB officials sometimes refuse to issue fertilizers if the message was deleted by mistake. NCPB sells fertiliser in 50kg bag, which the poor and vulnerable smallholder farmers cannot afford. Not every registered farmer got the message, and those who had the message had to get the fertilizer were required to appear in person at the pick-up point which was not possible. The NCPB depots were under-staffed and experienced system failure delaying the collection process further. Farmers have a perception that the blended fertilizer is of low quality especially the one supplied under the subsidy system. There were some unconfirmed reports of some rogue traders colluded with corrupt NCPB to get the subsidised fertiliser.

4.7. Implications on inputs markets

There are a number agro-dealers and distributors who participated in various subsidy programs like KCEP-CRAL, e-voucher and KCDMS. During the participation in these programs, the sales and income increased. However, some businesses did not experience the increased sales and incomes because very few farmers were able to redeem their vouchers during the e-voucher program.

KCDMS program was implemented in Bungoma, Kakamega, Makueni, Migori, and Taita Taveta. Within the package, the program incorporated services such as soil health for fertility enhancement, the soil PH testing services and extension services to the beneficiary farmers. KCDMS worked with a pre-qualified agro-dealers to distribute the fertilizer and facilitate the soil testing at a subsidised price. In Bungoma, the program begun when the farmers had already started planting. KCDMS did not offer lime/other inputs as part of the package but reduced the cost of a 50Kg bag. In Kakamega, there were 2 agro-dealers recruited in the program. In Migori, farmers would pay a small fee (KES 50) for the soil testing services. The business who participated in KCDMS program reported increase in sales volume especially for DAP and CAN.

E-voucher was implemented in 2021/22 whereby the government paid 40% of the cost to the agro-dealers while the farmers paid the remaining 60%. The fertilisers and seed were subsidised therefore farmers were able to access the inputs except for a few who could not redeem the vouchers. There was an increase in customers, sales and incomes. The e-voucher gave the distributors an opportunity to market themselves as a company increasing the clientele base.

County input subsidy program was implemented in Bungoma, Kakamega, and Nyandarua. The county subsidy was issued to the most vulnerable farmers who collected the fertiliser at the ward level. In Bungoma and Kakamega counties, the beneficiaries received planting fertiliser, top-dress fertilisers and seed. In addition, Kakamega county government provided farmers with tractors at a cost of Ksh 2500 per acre as compared to the market rate of Ksh 4000 per acre. In Nyandarua, the county government did not bundle fertiliser with other services instead they offered other products such as avocado seedlings, pyrethrum, strawberry, maize and other vegetables like spinach on full subsidy. The counties procured the fertiliser from KNTC and/or private enterprises/companies. The price quotations included estimated cost of transport to the nearest centre within the county. The county governments have put in place monitoring and evaluation mechanism that conducts spot checks to assess input distribution and farmers performance.

National Fertilizer Subsidy program (NFSP) was introduced in 2022. The subsidy prevents fertilizer distributors from exploiting farmers. Although the objective of the subsidy program is beneficial to the farmers, the private businesses have been affected negatively. The private input market has reduced sales and incomes resulting in reduction of the fertiliser volumes stocked (especially for the subsidised fertilisers) and the staff employed as well as not being able to finance loans. Some farmers and agro-dealers have started reselling the fertilizers after redeeming their vouchers bringing unfair competition.

However, the distributors and agrovets opted for other options to enable them stay in business. Agro-dealers have shifted their supplies to blended fertilizers, seed and agrochemicals resulting to an increase in sales and income for other agricultural inputs. Due to the availability of the subsidized fertilizer at a cheaper cost from the NCPB, farmers have disposable money available thus diverting the money they could have spent on fertilizer to buying other inputs. However, in Nyandarua some businesses reported reduction of sales in other inputs such as fungicides. Agro-dealers accommodate smallholder farmers by selling in smaller quantities e.g., 1kg, 2kgs etc although this may compromise the fertiliser quality. Agro-dealers stock fertiliser types not being offered by NFSP because they move quickly.

Besides NFSP, individual input sellers are competing with entities such as co-operatives, NGOs, Apollo and One-Acre fund reducing their customer clientele because the former do not give credit facilities. Some businesses have warmed up to offering credit to loyal farmers although some cannot afford to give credit. Small agro-dealers face stiff competition from upcoming and new businesses especially large distributors with financial muscles who are commanding volumes and selling fertilizer at lower price. One-acre fund runs the Tupande program where farmers visit the Tupande stores to collect fertilizers.

Some of the challenges faced by the private entrepreneurs include price volatility, restricted movement during COVID-19, unavailability of fertiliser types during the planting season, delayed delivery of the fertiliser, high cost of transportation and poor infrastructure/road networks affecting transportation. High demand for fertilizer during planting season resulting to delays in delivery. The customer demands and fertiliser prices have become uncertain hence making it hard to project on the required fertiliser types and quantities. Russia-Ukraine crisis led to low accessibility since we rely on imported fertilizer from those countries. The smaller packages e.g., 10kg and 25kg bag fertiliser is scarce during peak season. In Migori, county levies that are imposed on the transporters of fertilizers and other commodities are high translating to some transporters shying away from transporting commodities to Migori County. This affects timely delivery of fertilizers to the agro-dealers. Poor packaging materials in many companies so they are torn along the way. Businesses incurred losses after the subsidy program especially if there was old stock because the subsidized fertilizer is cheap compared to fertilizers sold by businesses. Government was given the first priority to make orders hence delaying timely procurement and delivery to distributors.

There were some claims that some fertiliser bags weighed less than the recommended weight, and poor quality. There was lack of storage facilities at the ward level which delays in delivery resulting to delays for farmers who would wish to plant early.

5.1 Summary

Collaboration between the public and private sectors can expand the farmers' access to fertilizers and benefit the businesses operations. Despite the benefits of the subsidies for the farmers, the accessibility is hampered by the long distances to the collection points especially for the elderly and vulnerable farmers. The high cost of transportation, long queues at the collection depots and slow process during fertiliser collection hinders the accessibility of the subsidised fertiliser. Both national subsidy programs focused on the fertiliser subsidy only while agriculture uses several inputs for improved productivity. Unlike its predecessor, the e-voucher which took 30 days to expire, the NFSP vouchers expire after two weeks. *

5.2 Recommendation

The proper timing for fertilizer application is important; the government should always make fertilizer available to farmers before the growing season begins, and it should first offer planting fertilizer before top-dressing fertilizer. The NFSP should incorporate the private sector such as agro-dealers and distributors to the program for more farmer inclusion. For new entrants or even the existing businesses, the future of fertilizer is gloomy. The situation for wholesalers and retailers will get worse if the government does not create fair ground by removing taxes and levies. Government should subsidize fertilizer at the source so that all purchasers, including distributors and agro-dealers, can obtain it and sell it at a price set by the government.

For farmers to have easy access to subsidised fertilizer, the NCPB storage facilities should be centrally located or establishment of new distribution depots closer to the farmers. For the goal of enhanced productivity to be achieved, timely fertilizer delivery, distribution of the right fertiliser and predictability of the subsidy are crucial. For example, top-dressing fertiliser was issued before the planting fertiliser. Farmers should do soil testing and profiling to identify the right fertilizer types suitable with their soils for maximum productivity. To reach the pro-poor and vulnerable smallholder farmers, subsidy programs should provide smaller packaging, such as 5kg, 10kg, and 25kg bags. Stakeholders should be involved in the design and implementation process to discuss the quantities, packaging sizes, and types of fertilizer that are appropriate for farmers. The subsidy programs should incorporate soil health aspect to ensure distribution and use of the right fertiliser. The utilization of a variety of enhanced inputs is essential to increasing productivity; as a result, an optimal subsidy should include inputs other than fertilizer.

The National Fertilizer subsidy program should incorporate the county government into the data systems to track the performance of the program without having to rely on managers to update records of farmers served and avoid duplication. The NCPB depots should not serve farmers from one county; instead, they should provide services to farmers closer to the depot in the neighbouring counties. To ensure that all farmers receive the fertilizer, the voucher's validity period should be increased to at least one month. To bring subsidised fertiliser closer to the farmers, the government can use the last-mile distribution system where they can establish collection points at ward level or use existing well-established co-operatives as collection points. The E-Voucher program should be brought back by the government because it helped more farmers and companies as well as farms.

All participants provided informed consent prior to their participation and publication of their opinions in this study.

Consent for publication

Not applicable

Competing interests

The authors declare that they have no competing interests

Funding

This research was funded by RTI

Authors' contributions

Each author made contribution to the research paper as follows: Conceptualization; Timothy Njagi, Robert Mwadime, Seth Yake and Claris Riungu. Methodology; Timothy Njagi and Claris Riungu. Software; Claris Riungu and Joseph Opiyo. Validation; Timothy Njagi, Robert Mwadime, and Seth Yake. Formal Analysis; Claris Riungu and Joseph Opiyo. Investigation; Timothy Njagi, Claris Riungu and Joseph Opiyo. Data Curation; Timothy Njagi, Claris Riungu and Joseph Opiyo. Writing – Original Draft Preparation; Timothy Njagi, Claris Riungu and Joseph Opiyo. Writing – Review & Editing; Timothy Njagi. Visualization; Timothy Njagi and Joseph Opiyo. Supervision; Timothy Njagi, Robert Mwadime, and Seth Yake. Project Administration; Timothy Njagi and Seth Yake. Funding Acquisition; Robert Mwadime, Seth Yake and Timothy Njagi.

Acknowledgements

We wish to acknowledge the financial support received from RTI, and the technical reviews during the writing of the article. Special thanks to the RTI team for their support during the research. A special thank you to key stakeholders and local leaders in the areas of study, and the farmers who unreservedly took time from their tight work schedule to offer information sought by the enumerators. The hard work and dedication of the field team is highly acknowledged

Availability of data and materials

The datasets during and/or analysed during the current study available from the Timothy Njagi ([email protected] ) on request.

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The authors declare no competing interests.

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Assessment of the impact of the Kenya Government fertilizer subsidy on the performance of domestic private sector fertilizer trade

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Abstract

Figures

1.0. Introduction

2.0. Materials and Methods

3.0. Fertilizer Subsidies in Kenya

3.1. Evolution of fertilizer subsidy programs

3.2. Changes made to the structure of the NFSP

3.3. Other input subsidy programmes

4.0. Discussion

4.1. Fertilizer value chain map

4.2. Fertilizer imports and domestic fertilizer prices

4.3. Analysis of distribution costs

4.4. Distribution and access to subsidised fertilizer

4.5. Effect on private sector fertilizer sales

4.6. Implication on farmers

4.7. Implications on inputs markets

5.0. Summary and Recommendations

5.1 Summary

5.2 Recommendation

Declarations

Consent for publication

Competing interests

Funding

Authors' contributions

Acknowledgements

Availability of data and materials

References

Additional Declarations

Supplementary Files

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