24 March 2014
By Moses Michira
The Standard Digital
Kenya: Kenya’s flower industry is a lucrative one, worth over Sh80 billion in revenues a year, but the recent collapse of Karuturi with billions in unpaid obligations could be the clearest indicator yet that the ground is shifting.
There is consensus among flower producers that Ethiopia has an edge over Kenya in tax incentives and better access to new markets to the US owing to the direct flights it operates through its national airline.
And now the European Union has made a new demand that could further hurt flower exports, especially after Parliament declined to enter an economic partnership with the bloc. Starting October 1, flower exports to the EU will attract an import duty of 8.5 per cent, which will push up prices of Kenyan flowers and reduce their competitiveness in the market. The same taxes will not affect the other Eastern African countries, including Ethiopia, Rwanda and Tanzania, which are classified as least developed while Kenya is not.
Kenya sells more than 70 per cent of its flowers to the EU, mostly through auctions in the Netherlands and direct sales to resellers such as supermarkets.
It is these emerging challenges that could have informed Karuturi’s collapse, say insiders.
“The focus has been Ethiopia — that is where the money has been going,” a manager told Business Beat.
Kenya currently supplies around 38 per cent of the fresh flower imports into the EU, but there are fears that market share could be chopped. Columbia and Ethiopia are the other key source markets.
The concerns could be valid given that Sher Agencies, which was once the world’s largest roses producer, moved to Ethiopia after selling its Kenyan business to Karuturi seven years ago. Several other companies with operations in Kenya are said to be looking north, taking the cue from Sher.
Naivasha MP John Kihagi says Kenya “has a situation to handle” in its flower sector, which is estimated to employ 500,000. President Uhuru Kenyatta is expected to make a case for Kenya in the latest round of negotiations starting today, regarding the economic partnership.
Under the Economic Partnership Agreement, Kenya and its neighbours would be expected to cut taxes levied on imports from the EU, which is the point of contention.
Karuturi has acquired long leases on about 350,000 hectares in Ethiopia where it is in different stages of producing grains and flowers. Despite the multi-billion dollar investment, Karuturi’s Kenyan subsidiary has been struggling to the point of failing to pay salaries while supplies to its farms, such as fertilisers and pesticides, have run dry.
Its workers have staged violent protests owing to delayed wages and deteriorating living conditions, compounding problems for a company that has been accused of tax evasion by the government.
Karuturi’s senior staff say the local subsidiary has been under-billing its sister companies registered in tax havens for flowers produced in Kenya.
Tax experts argue that the losses reported could be artificial to enable the firm utilise a trading mechanism called transfer pricing. In Karuturi’s case, a subsidiary domiciled in Dubai handles the export and selling of flowers to report huge profits for the mother company that is listed on the Mumbai Stock Exchange.
The Kenyan business produces between 350 million and 400 million flowers annually, and is the flagship operation for Karuturi Global, which made Sh1.5 billion in profits in 2013 while the local subsidiary reported a Sh208 million loss.
Receiver managers appointed by CFC Bank, whose loan Karuturi defaulted on, think the business should be very profitable. Its latest exports are fetching prices upwards of 0.25 euros (Sh29.8), which is higher than the 0.04 euros (Sh4.8) Karuturi was selling its stems at.