2019

COMPETITION ASSESSMENT OF THE

TEA INDUSTRY IN PAKISTAN

COMPETITION
Please share your comments with:

Ms. Kishwar Khan, Director General, CCP

COMMISSION OF
Email: [email protected]
PAKISTAN
Abbreviations

AJK Azad Jammu and Kashmir

APTTA Afghan Pakistan Transit Trade Agreement
CCP Competition Commission of Pakistan
FATA Federally Administered Tribal Areas
FAO Food and Agriculture Organization
GST General Sales Tax
HHI Herfindahl–Hirschman Index
KPK Khyber Pakhtunkhwa
NIC National Identity Card
NTHRI National Tea and High Value Research Institute
NTRS National Tea Research Station
NWFP Northwestern Frontier Province
PARC Pakistan Agricultural Research Council
SRO Statutory Regulatory Order
SBP State Bank of Pakistan
ZTBL Zarai Taraqiati Bank Limited

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TABLE OF CONTENTS

EXECUTIVE SUMMARY ............................................................................................... vi

1. DEFINITION OF THE ‘RELEVANT MARKET’ ............................................................1

1.1 Product Market ............................................................................................................... 1
1.2 Geographic Market.......................................................................................................... 1
2. GLOBAL TEA INDUSTRY .......................................................................................2
2.1 Production ............................................................................................................................. 2
2.2 Tea Exports ............................................................................................................................ 5
2.3 International Prices ............................................................................................................... 7
2.4 Consumption ......................................................................................................................... 9
3. Tea Consumption in Pakistan ............................................................................ 13
3.1 Branded Tea Consumption ............................................................................................ 14
3.2 Loose Tea Consumption ................................................................................................ 14
4. Market Players in the Branded Tea Industry...................................................... 16
4.1 Packaged Tea Suppliers ................................................................................................. 16
4.1.1 Tapal Tea (Private) Limited (TTPL) ......................................................................... 16
4.1.2 Unilever Pakistan Limited (UPL) ............................................................................ 16
4.1.3 Eastern Products (EP) ............................................................................................ 17
4.1.4 Who left the market - Tetley Clover (Private) Limited (TCPL) ............................... 17
4.2 Pakistan Tea Association ............................................................................................... 18
4.3 Market Shares ............................................................................................................... 18
4.4. Concentration level in the industry .................................................................................... 19
5. Price Trends ..................................................................................................... 21

6. Tea Trade ......................................................................................................... 26

6.1 Factors Affecting Imports .............................................................................................. 29
6.2 Tea Smuggling................................................................................................................ 30
6.2.1 Curbing Smuggling ................................................................................................. 34
7. Tea Production in Pakistan ............................................................................... 39
7.1 Tea Growing Initiatives .................................................................................................. 39
7.1.1 The Role of National Tea and High Value Research Institute (NTHRI) .................. 40

ii
 7.2 Crop Characteristics....................................................................................................... 42
7.3 Land ............................................................................................................................... 43
7.4 Water ............................................................................................................................. 45
7.5 Market ........................................................................................................................... 45
7.6 Financing........................................................................................................................ 46
7.7 Training .......................................................................................................................... 46
8. International Production Models ...................................................................... 47
8.1 Small Holders ................................................................................................................. 47
8.2 Large-Scale Corporate-Estate ........................................................................................ 47
8.3 Options for Pakistan ...................................................................................................... 47
9. Barriers to Entry in the Market and Competition Concerns ................................ 49
9.1 Natural Barriers ............................................................................................................. 49
9.1.1 Soil and Climatic Conditions .................................................................................. 49
9.1.2 The Socio-economic Conditions ............................................................................ 49
9.2 Strategic Barriers ........................................................................................................... 50
9.3 Regulatory or Policy Barriers ......................................................................................... 51
9.4 Competition Concerns ................................................................................................... 51
10. Recommendations............................................................................................ 53
10.1 Controlling Smuggling.................................................................................................... 53
10.1.1 Revisiting Transit Trade Agreement ...................................................................... 53
10.2 Creation of a Tea Wing .................................................................................................. 54
10.3 Ensuring Land Availability .............................................................................................. 54
10.4 Enhancing Competition ................................................................................................. 54
Annexure I ................................................................................................................................. 57
Annexure II ................................................................................................................................ 57
References ................................................................................................................ 58

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List of Figures

Figure 1: Rank of Tea Producing Countries (2013-17)..................................................................... 2

Figure 2: Actual and Projected Production of Tea (000 tonnes) ..................................................... 5

Figure 3: International Tea Price ..................................................................................................... 8

Figure 4 : FAO Tea Prices projections to 2027 (USD/Kg) ................................................................. 8

Figure 5: Black Tea: Actual and Projected Consumption .............................................................. 10

Figure 6: Percentage Distribution of Estimated Market Shares .................................................... 19

Figure 7: Concentration Level in the Tea Industry - HHI ............................................................... 19

Figure 8: Tea Prices of Lipton and Tapal (Rs/kg) ........................................................................... 23

Figure 9: Packaged and Loose Tea - Price Comparison ................................................................. 23

Figure 10: Trend in Mombasa/Nairobi Tea Prices (USD/kg ) ........................................................ 28

Figure 11: Tea imports under ATTA/APTTA in Packages exceeding three Kgs.............................. 30

Figure 12: Black Tea Imports under ATTA/APTTA in Packages not exceeding 3 kgs. .................... 31

Figure 13: Topographic sketch for tea growing area in Pakistan .................................................. 41

List of Tables

Table 1: Global Tea Production ....................................................................................................... 4

Table 2: Tea Exports in 2017 (US$) .................................................................................................. 6

Table 3: World Tea Consumption .................................................................................................. 11

Table 4: Estimated Tea Statistics for Pakistan ............................................................................... 13

Table 5: Tea Prices from 2014-2018 .............................................................................................. 22

Table 6: Total Import in $/kg ......................................................................................................... 26

Table 7: Statistics of Major Tea Auctions in US$/Kg ..................................................................... 27

Table 8: Kenya Tea Auction Prices (USD/kg ) ................................................................................ 27

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Table 9: Value of Tea Imports ....................................................................................................... 30

Table 10: Legal Imports vs. Smuggled Tea .................................................................................... 32

Table 11: Effective Tax Burden at Sales Tax of 17%, 16% and 5%................................................. 34

Table 12: Estimated Tax Revenue Lost due to Smuggling ............................................................. 36

Table 13: Estimated Tax Revenue Lost due to Smuggling in 2016-17 & 2018 .............................. 36

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EXECUTIVE SUMMARY

Pakistan has a tradition of tea consumption, which is closely associated with hospitality
in the society. A cup of tea in the morning and evening is a part of Pakistanis’ routine life.
Pakistan is amongst the major importers of tea, the industry depends entirely on
imported tea, with a negligible quantity of tea is produced domestically. In 2014, the long
established culture of having tea ‘any time - anywhere’ accorded Pakistan the status of
being the second largest importer of tea, after the Russian Federation.1
Tea is a declared essential commodity, therefore, the Competition Commission of
Pakistan (CCP) chose the ‘Tea Industry in Pakistan’ for a competition assessment. This
Report, while providing a profile of the industry, focuses on an array of competition issues
including market development through tea cultivation in the country, and market
dynamics affecting tea prices.
Black tea accounts for around 75% of global tea production.2 In 2017-18, Pakistan
imported black tea from 17 countries.3 The imported tea is blended to produce various
varieties to suit consumers’ preferences, and then either packaged or sold in loose form
for consumption. Within the branded packaged tea industry, there are only a few major
players: Tapal, Unilever and Vital. About 80% of the formal sector market is accounted for
by two major companies: Tapal and Unilever, with Tapal taking the lead with a market
share of about 45 to 47%.4 The Herfindahl-Hirschman Index (HHI) index for measuring
concentration is 3886, which indicates that the industry is highly concentrated.5 However,
the concentration per se is not an indicator of abuse of dominance, yet it points towards
influence in the market.
A major challenge faced by the tea industry in Pakistan is smuggling. Under the agreement
for transit trade, Afghan imports land at Karachi port, which are then dispatched for

1
Pakistan Tea Association.
2
http://agritrade.cta.int/Agriculture/Commodities/Tea/Tea-Trade-issues-for-the-ACP
3
Pakistan Tea Association. http://www.pakistanteaassociation.com/statistics.html
4
Pakistan Tea Association.
5
HHI is a standard measure to assess market concentration. It is calculated by squaring the market share
of each firm competing in a market, and then summing the resulting numbers.

vi
Afghanistan. However, instead of entering Afghanistan or even after its entry in
Afghanistan, the tea is brought back to Pakistan. This smuggled tea is then sold in the local
market along with the legally imported tea. The import cost6 of tea imported for Pakistan
is estimated to be around 32% greater than tea imported for Afghanistan due to the
various taxes paid by domestic importers. Due to the cost difference, legally imported tea
cannot effectively compete with smuggled tea. The Authority dealing with transit trade
highlights that there are no scanners for containers on Afghan border for transit trade, to
confirm if the same things are entering Afghanistan that were received in Karachi.

In 2012, the government reduced sales tax from 16% to 5% in an effort to reduce
smuggling. This initiative was reversed within 8 months, without allowing for sufficient
time to be impactful to curb smuggling. In our view, a combination of tax cuts and
enforcement measures are needed to effectively reduce smuggling and to ensure a level
playing field in the tea industry.

The report also reviews the history of tea production in the country. The attempts to
domestically produce tea started in 1958 but these were not followed up as production
in the then East Pakistan (now Bangladesh) met the demand. Efforts were reinitiated
later; but Pakistan’s tea production remained negligible. Based on our discussions with
industry sources and experts at the National Tea and High Value Crops Research Institute
(NTHRI), the tea cultivation is successful in Pakistan. Pakistan exported black tea
processed at NTHRI during current spring season (1 ton) and green tea (2.5 tons) to Royal
world Co. Akasaka, Tokyo, Japan. However, the two major challenges to domestic tea
production on commercial basis are:

i. Lack of incentives for farmers to produce tea for a very concentrated buyer’s
market. The only possible buyers for tea leaves are NTHRI and Unilever. If
these buyers cannot purchase their crop, the farmers have no other buyer.

6
Cost of imported merchandise at the port, including taxes.

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 ii. The crop has a long germination time (4-5 years), which later produces a
harvest for almost a 100 years. Investors need resources, especially land,
under a long-term contract to make the investment in production and
processing feasible. Such a commitment from individual subsistence farmers
with small holdings has been difficult to obtain.

NTHRI and industry players are of the view that an incentive package may help attract
private companies to invest in tea cultivation in the identified land tract. By giving
appropriate incentives like guaranteed land availability, private tea producers may be
inclined to invest in tea farming and processing. These measures can help form a tea
industry cluster in the area with a comparative advantage in tea production, thus adding
to the competition and efficiency. Food and Agriculture Organization of the United
Nations (FAO) indicates that tea growing has immense trickle down effects to rural
household incomes. For indigenous tea cultivation, the companies will have an advantage
of saving on account of transportation cost and royalty payments. Creation of a ‘Tea Wing’
in the Ministry of Food Security and Research can go a long way to eradicate hurdles in
tea cultivation through suitable policy formulation. Expertise for tea cultivation is
available in the form of NTHRI, which may be used, and can prove to be cost effective in
the long run.

The Report finds that there are prospects for improving competition in the tea market
through: fostering market expansion and improving market transparency. The specific
concerns include adulteration in the loose/open tea, deceptive marketing when fake tea
is sold in branded tea packs, unexplained price increases, and an inadequate
implementation of consumer protection framework, particularly in the Federal capital.

________________

viii
1. DEFINITION OF THE ‘RELEVANT MARKET’

In order to ensure that the research remains focused on the targeted product, we must
define the relevant market. This market is constituted by the product and geographic
market.

1.1 Product Market

The product market consists of interchangeable and substitutable products. In our case,
we will define the product market to consist of the dried crushed leaves from the tea
plant used to make a hot beverage by infusing the black tea leaves in boiling water. A
plant namely ‘Camellia Sinensis’ produces the buds and leaves, which are commonly
known as tea. Though, black and green tea is made from the same plant leaves but they
differ in the production process. Black tea results from leaves that are fully oxidized, while
green tea leaves are steamed, rolled and dried without any oxidation. This report only
covers the ‘black tea’ segment of the tea industry.

1.2 Geographic Market

The geographic market consists of the area in which the industry supplies the product
with homogenous competition conditions that are sufficiently different from conditions
in neighboring geographic areas. The population in almost all geographic locations of
Pakistan consumes the beverage. Therefore, for our study, we will take Pakistan as the
geographic market in order to study the state of competition in the industry.
_________________

1
2. GLOBAL TEA INDUSTRY

Pakistan’s tea industry has strong linkages with the global tea industry. Therefore, this
section has been devoted to look into the salient features of the international tea
industry. Tea is grown in 36 tropical and semi-tropical countries having a broad range of
agro-climatic conditions, between 42'N (Georgia) and 35'S latitude (Argentina).

2.1 Production

The main tea producing countries are:

i. Asia: Bangladesh, China, India, Indonesia, Sri Lanka, Viet Nam and others.
ii. Africa: Burundi, Kenya, Malawi, Rwanda, Tanzania, Uganda, Zimbabwe and
others.
iii. South America: Argentina, Brazil and others
iv. Near East: Iran and Turkey.

Figure 1: Rank of Tea Producing Countries (2013-17)

3000000

2500000

2000000
in metric tons

1500000

1000000

500000

0
2013 2014 2015 2016 2017

China India Indonesia Kenya Srilanka

Source: Supplement of Annual ITC Bulletin of Statistics – 2015 and 2017

2
The global tea production including black, green, instant and others, is estimated to have
increased by 4.4% per annum in the last decade at 5.73 million tonnes in 2016 (Table 2).
China remained the main contributor, where production more than doubled from 1.17
million tonnes in 2007 to 2.44 million tonnes in 2016. China has a share of 42.6 percent
in world tea production. India is the second largest producer with an output of 2.44
million tonnes in 2016. Production increased to a record high of 1.27 million tonnes, due
to favourable weather conditions. Output in the two largest exporting countries, Kenya
and Sri Lanka, reached 475 300 tonnes and 295 300 tonnes, respectively. Production in
Kenya increased by 18 percent, while in Sri Lanka it declined by 11 percent. The tea
industry in Sri Lanka showed its greatest year-on-year crop shortfall due to severe
weather conditions, coupled with government restrictions on fertilizer subsidies.
However, the declines in 2015 and 2016, recovered in 2017.

3
 Table 1: Global Tea Production

Source: FAO, 2018

4
Figure 2: Actual and Projected Production of Tea (000 tonnes)

At the world level, black tea production

increased annually by 3 percent. Robust
demand and associated high prices
stimulated substantial supply increases
over the past decade, resulting in
significant growth in domestic
consumption and trade. Export
earnings at the global level increased by
75 percent over the 10 years, from USD
3.12 billion in 2007 to USD 5.46 billion
in 2016, contributing to improved rural
incomes and household food security
Source: FAO, 2018 in tea producing countries.

2.2 Tea Exports

World tea exports increased annually by 1.4 percent over the last decade to reach 1.75
million tonnes in 2016, underpinned by larger shipments from Kenya, with exports
reaching a record level of 436 924 tonnes in 2016, a 16 percent increase from 2015.
However, India achieved the highest tea exports in 2017, after 36 years, thus hitting the
record levels registered in 1981.

5
 Table 2: Tea Exports in 2017 (US$)

Rank Exporter Export Value Share (%)

1 China 1.6 billion 20.6
2 Sri Lanka 1.5 billion 19.3
3 Kenya 1.4 billion 18.2
4 India 591.2 million 7.5
5 United Arab 286.8 million
Emirates 3.7
6 Germany 245.2 million 3.1
7 Poland 189 million 2.4
8 United 137.7 million
Kingdom 1.8
9 United States 136.1 million 1.7
10 Japan 129.9 million 1.7
Source: http://www.worldstopexports.com/tea-exports-by-country/

The other countries having a share of more than 1% include Japan: $129.9 million (1.7%),
Vietnam: $123.7 million (1.6%), Indonesia: $114.2 million (1.5%), Netherlands: $100.5
million (1.3%), Argentina: $95.6 million (1.2%), and Russia: $92.3 million (1.2%). The top
15 countries shipped 86.7% of global tea exports in 2017 by value. Among the above
countries, the fastest-growing tea exporters since 2013 were: Japan (86.7%), United
States (39.9%), China (29.3%) and Netherlands (22.1%). Those countries that posted
declines in their exported tea sales were led by: Vietnam (-46%), India (-27.6%), Indonesia
(-27.5%), United Kingdom (-26.1%) and Argentina (-18.2%).
It is interesting to note here the experience of UAE. In 2005, Dubai added tea to its Multi
Commodities Centre as half the world’s tea sailing past its port. Now, it accounts for 60%
global tea re-exports, often after value addition. About 5 million metric tons of tea is
traded between producers and consumers. Trade zone permits 100 percent foreign
ownership; provides a 50-year exemption from corporate tax, income tax, and tariffs; and
permits traders to return to their home countries with capital, profits, and currency.
Dubai tea center provides a platform for companies looking to set up in Dubai with

6
immediate access to a purpose-built infrastructure, business services and a growing
community of producers, exporters, traders, and entrepreneurs.

2.3 International Prices

International tea prices are measured by the FAO Tea Composite price (FTCP). This is a
weighted average price index for black tea, which includes CTC and Orthodox teas. 7 The
FTCP fell by 4.4 percent in 2016, due to continued weakened economic growth rates
associated with lower world oil prices. After declining to 2.57 USD per kg in 2016, the FAO
Tea Composite Price increased by 22.6% in 2017, to a record high of 3.15 USD per kg. The
significant increase is owed to rising domestic and foreign demand and tighter supplies.
Prices increased sharply for both, orthodox and CTC teas, in the four major auctions:
Calcutta, Cochin, Colombo and Mombasa. (Figure 2).
Since major producers, like China and India, are also among the biggest consumers of tea,
less than half of the production is exported. Kenya is one of the world’s leading black tea
producer and exporter. Due to its comparative advantage, Kenya has achieved a position
of strategic importance in the industry. It auctions tea from across the East African region
at the weekly Mombasa tea auction, which is one of 11 tea auction sites across the globe,
including the rather recently established Dubai Tea Trading Centre. While most of the tea
is sold in the international market through auctions, some trading also occurs through
private deals. There is no single world price for tea, but prices differ at different auctions,
reflecting tea quality and specialization.

7
Orthodox Teas are whole leaf teas manufactured using the traditional process of making tea. CTC Teas are
made through the Crush, Tear, and Curl (CTC) process of producing a granular leaf particle.

7
 Figure 3: International Tea Price

Source: FAO, 2018

Figure 4 : FAO Tea Prices projections to 2027 (USD/Kg)

Source: FAO, 2018

The review of the world tea market indicates a 2.2 percent increase in trade volumes in
2016, resulting in an estimated 2.8 percent decline in export earnings to USD 5.46 billion
at the global level. However, the export revenues contributed significantly to financing
the food import bills of tea exporting countries. For example, in Kenya and Sri Lanka
export earnings of USD 1.15 billion and USD 1.63 billion, respectively, financed more than
60 percent of Kenya’s and 63.8 percent of Sri Lanka’s food import bills in 2014.

8
In terms of price developments, the average FAO Composite Price remained firm over the
last decade until 2014 when there was a 5.3 percent decline, mainly due to the weakening
of CTC tea prices. Prices recovered in 2015, reflecting the recovery in CTC prices offsetting
the decline in orthodox teas as imports from the Russian Federation and the Near East
fell due to weakened economic growth rates associated with lower world oil prices. In the
medium term, the projections suggest that supply and demand of black tea will be in
equilibrium in 2027 at a price of USD 3.0 per kg. Prices over the last decade increased
from an annual average of USD 2.39 per kg in 2008 to USD 3.15 per kg in 2017, with
monthly peaks of USD 3.18 per kg, USD 3.00 per kg and USD 3.26 per kg, reached in
September 2009, December 2012 and May 2017, respectively. The projections indicate a
decline in nominal terms of 1.4 percent, while in real terms, prices would actually decline
by an annual average of 3.6 percent over the next decade.

2.4 Consumption

World tea consumption increased annually by 4.5 percent to 5.5 million tonnes over the
decade to 2016 (Table 3). The expansion was derived by growth in per capita income in
China, India and other developing and emerging economies. Growth in demand expanded
significantly in most of the tea producing countries in Asia, Africa and Latin America. In
China, consumption expanded at an annual rate of 10.1 per, reaching 2.1 million tonnes
in 2016, or 38.6 percent of world tea consumption. India, with consumption at 1.05
million tonnes, was the second largest tea consumer in 2016, accounting for 19.0 percent
of the global total. In importing countries of Europe (except Germany), tea consumption
declined as competition from other beverages, particularly bottled water and carbonated
drinks, has intensified. While for the Russian Federation, the decline in oil prices
negatively impacted tea imports.

9
 Projected Consumption
Major factors contributing to
Figure 5: Black Tea: Actual and Projected Consumption
expansion in tea consumption
are the growth in per capita
income, the increased
awareness of the health
benefits of tea consumption
and the product diversification
process attracting more
customers in non-traditional
segments including young
people. The rapid growth of
black tea consumption in China
is due to the popularity of brick teas, such as Pu’er, which are promoted for their health
benefits.
FAO has estimated black tea consumption to grow at 2.5 percent annually to reach 4.17
million tonnes in 2027. The strong growth in consumption in producing countries would
more than offset projected declines in tea importing countries. The largest expansion
within the five top producing countries is expected in China where an annual growth of
5.9 percent is projected over the next 10 years. African countries are expected to show
higher growth in their consumption with Rwanda leading the move (9 percent) followed
by Uganda (5 percent), Kenya (4.4 percent), Libya (4.4 percent), Morocco (4.2 percent),
and Malawi (4.2 percent).
Moderate growth rates ranging between 2 and 3.5 percent are expected in other tea
producing countries such as Bangladesh (3.1 percent), India (2.2 percent) and Sri Lanka
(3.3 percent). Lower consumption growth rates are expected in western countries with
UK consumption projected to be negative as black tea struggles to maintain consumers’
interest amid growing competition from other drinks including coffee. Only Germany (1.4
percent) and Poland (1.3 percent), followed by the Netherlands and France (both at 0.6

10
percent) are expected to have consumption growth rates higher than the region’s average
of 0.2 percent.
Table 3: World Tea Consumption

Source: FAO, 2018

11
The FAO Intergovernmental Group (IGG) has encouraged diversification into other
segments of the market, such as organic tea; the health benefits of tea consumption
should be used more extensively in promoting consumption. The impact of these
recommendations of the IGG can be seen in the local tea market.

_________________

12
3. Tea Consumption in Pakistan
Several factors affect tea consumption, including the traditional price and income
variables and demographics such as age, education, occupation and cultural background.
In addition, health has a great influence on tea consumption as people increase their
awareness about health impacts of carbonated drinks. Tea is not a perfect substitute but
it is being a beneficiary when sales of such beverages decline.

Table 4: Estimated Tea Statistics for Pakistan

2013 2014 2015 2016 2017

Consumption
195,364 190,537 212,456 223,843 223,022
(Tonnes)

Import
Quantity 126,633 137,877 151,861.07 173,749 175,011
(Tonnes)

Import Value
33,567,661 31,200,344 43,939,000 44,815,056 53,022,477
(000 Rs.)

Import Value
(000 USD) 329,095 308,456 426,509 427,788 503,155

Smuggled Tea
68,730 52,660 60,595 50,093 48,012
(Tonnes)

Source: Industry Association

In Pakistan, the tea consumption remained about 223 thousand tonnes in 2017, which
shows an increase of about 14% over the last five years. In the same period, the import
quantity and value increased by 40 and 58%, respectively. Therefore, in Pakistan, as
elsewhere, the black tea consumption has remained price inelastic. Tea smuggling has
been estimated to decline by 30% yet it remains significant at about 22% of the total
consumption. Federal Bureau of Revenue (FBR) has estimated smuggled tea to be about

13
more than 50% of the total tea consumption.8 This consumption can be divided into two
parts: branded packaged tea and loose tea. In the branded segment, there are only a few
market players, whereas unbranded segment is composed of numerous players selling
loose/open tea.

3.1 Branded Tea Consumption

In Sindh, branded tea is consumed in most of the cities, whereas in the rural areas, both
branded and unbranded are equally popular. In Punjab, city dwellers as well as a majority
of rural areas are mostly brand loyal, while unbranded tea is only popular in small tea-
shops (Khoka) and hotels. As far as the tea demand in Pakistan is concerned, there is an
opportunity for further market entry that may help smooth price fluctuations and expand
the supply to meet growing demand. Our survey indicates that the demand is increasing
for high-quality, high-value products, especially in urban areas. The evolving taste of tea
demanded also suggests a trend towards higher value-added products, creating an
opportunity for innovation and product differentiation through blending varieties to
create taste that suits Pakistani consumers.

3.2 Loose Tea Consumption

More than half of the total tea consumption is represented by loose unbranded tea,
especially in rural areas. In Khyber Pakhtunkhwa (KPK) and Balochistan, most of the
population prefers the unbranded form mainly because of two reasons: firstly, it is
relatively cheaper; and secondly, it gives consumers a chance to see and smell what they
buy before paying for it.

Within the market for loose tea, there is significant illegal trade. The estimated proportion
of smuggled tea in the total tea market volume has remained more or less around 25-
30%. This creates a very uneven market for tea suppliers since smuggled tea was at least

8
https://tribune.com.pk/story/1766456/1-smuggled-goods-account-59-demand-across-major-sectors

14
30% cheaper than the imported tea due to tax evasion. In 2014, the difference between
the price of Tapal and loose tea was Rs 113, which increased to Rs. 276 in 2018. In the
same duration, for Lipton the price differential was Rs 150 that increased to Rs. 310. The
cost difference increased because of the increase of sales tax to 17% in the budget for the
fiscal year 2014.9 By selling the product at a cheaper rate, the smugglers pulled the sales
away from legal importers, who have to sell at a higher rate to cover their costs. Given
the high consumption of tea in Pakistan, within which half is represented by loose tea,
there is plenty of opportunity for packaging companies to enter the market. However, the
uneven playing field is a major challenge that discourages a new entrant. Entry of new
competitors strengthens the competition forces, which steer the industry towards
greater efficiency. Therefore, the issue of creating a level playing field, through effectively
restricting smuggling, is crucial for the development of a competitive formal sector
market.

___________________

9
Ad valorem taxation. Custom duty=10%* Import Price, Sales Tax=17%*(Import Price + Custom duty),
Withholding value-added Tax (Import Price+ Custom duty+ Sales Tax) 3%.

15
4. Market Players in the Branded Tea Industry

There were four main players in the branded and packaged tea industry: Unilever, Tapal,
Vital and Tetley. 82% of this market was divided amongst just 2 major players: Unilever
and Tapal. In 2014, the Herfindahl–Hirschman Index (HHI), measuring the level of
concentration in the industry, was 3646, which in 2018 has increased to 3886, due to the
exit of Tetley. This level of concentration is quite high, indicating an oligopolistic market
structure. This aspect is deliberated upon in the later part of this section.

4.1 Packaged Tea Suppliers

The following is an overview of the major suppliers of packaged tea:

4.1.1 Tapal Tea (Private) Limited (TTPL)

TTPL was founded by Adam Ali Tapal in 1947; the third-generation CEO Aftab Tapal
rejuvenated it in 1977. The company was incorporated in Pakistan on 13 March 1979 as
a private limited company under the Companies Act, 1913 (now the Companies
Ordinance, 1984). The principal activity of the Company is to blend and sell tea and other
related products under the brand name of Tapal. The registered office of Tapal is in
Korangi Industrial Area, Karachi. Tapal's deep-rooted culture and core values differentiate
it from its competitors. In December 1997. Tapal Tea was the first Pakistani Tea Company
that got the ISO-9001 and ISO-9001:2000 certification. Again in December 2000, Tapal
acquired the. Major brands include Chenuk Kenya Dust, Danedar, Family Mixture,
Mezban Premier Dust, Safari, and Tezdum.

4.1.2 Unilever Pakistan Limited (UPL)

UPL is a limited liability company incorporated in Pakistan that was listed on the Karachi,
Islamabad and Lahore stock exchanges (now Pakistan Stock Exchange). Besides tea, it

16
manufactures and sells home and personal care products, beverages, ice cream and
spreads. The registered office of the company is situated at Avari Plaza, Karachi. The
company is a subsidiary of Unilever Overseas Holdings Limited, UK, whereas the ultimate
parent company is Unilever PLC, UK. Unilever’s major brands include Lipton Yellow Label,
Brook Bond Supreme, Pearl Dust and Brook Bond A-1 Kark Chai.

4.1.3 Eastern Products (EP)

Vital Tea is a brand of Eastern Products. The company was established in 1991, with its
registered office in Bahawalnagar, Punjab. Vital Tea was launched at a small town in
Punjab, ‘Haroonabad’. Major brands include Vital Tea, Dawn Classical Dust Tea, and
Surhan Dust. Vital is marketing tea in various shapes of tea bags.

4.1.4 Who left the market - Tetley Clover (Private) Limited (TCPL)
TCPL was incorporated in Pakistan on July 25, 2003, as a private limited company, under
the Companies Ordinance, 1984. The company was formed on May 12, 2003 after a joint
venture agreement, signed between Tetley Overseas Holdings Limited10, United Kingdom
(TOHL), and Siza Services (Private) Limited (SSPL), a Lakson Group Company, wherein the
said companies agreed to participate and invest equally in the equity of the joint venture.
The company was engaged in the import, blending, packaging and marketing of the
“Tetley Tea”. Tetley’s major brands included Josh Dust, Strong and Tetley Gold.

The company left Pakistani market on account of several marketing related issues. These
include name and packaging problem, where the Pakistani consumers could not
familiarize well with the name. The packing was in purple colour against popular golden,
brown or yellow shades for teas. The advertisements could not make their impact due to
unclear slogan i.e. ‘pehley ankhon sey pee, saanson sey pee, phir honton sey pee to janat
mili’. This was in contrast to the other brands, such as Tapal uses ‘family’ concept, showing
family members bonding. Lipton caters the youth and teenage segment. Tetley,

10
Tata Global Beverages Limited (formerly Tata Tea Limited) an Indian multinational acquired the Tetley
Group (based in the United Kingdom) in 2000.

17
therefore, having a tea bag segment could not sustain also due to its higher price and
distribution system failure.

4.2 Pakistan Tea Association

Pakistan Tea Association is an important stakeholder and plays an important role in the
tea industry. The association represents more than one hundred and fifty tea importers
and blenders. The members meet periodically to discuss challenges faced by the industry
and possible solutions. The association actively lobbies with the government for more
favorable policies for the tea industry.

4.3 Market Shares

During 2012 to 2017, the tea market saw a gradual change in the market shares. Tapal
Tea continued to lead the market, with a 47% share in 2014, which was previously noted
to have a share of 48%. In 2018, it successfully captured more than 50% of the market.
Tapal is followed by Unilever (31%) and Vital Tea (18%). In 2003, the share of the Unilever
was as high as 68% which declined subsequently. Tetley Clover (4%) lost its share in this
duration and exit the market. Tetley Clover invested in expanding manufacturing and
distribution in Pakistan, especially in urban areas; however, a number of its brands were
withdrawn from the market in 2012-13, leaving only three brands catering to consumers,
mostly in Sindh and Punjab. Figure 6 shows the estimated market shares.

18
 Figure 6: Percentage Distribution of Estimated Market Shares

Tapal Unilever Vital Tetley

68

52 51
47
41
35
30 31

18

8
4 4
2 2
0 0

2003 2005 2010 2018

Source: Pakistan Tea Association

4.4. Concentration level in the industry

The Herfindahl-Hirschman Index (HHI) measures the size of firms in relation to the
industry. This economic concept is widely applied in competition law, as it indicates the
level of competition in the market. The index ranges from 0 (perfect competition) to
10,000 points (single firm monopoly).

Figure 7: Concentration Level in the Tea Industry - HHI

5528

3949 3970 3886

2003 2005 2010 2018

Source: Based on market research

19
A market is considered to be concentrated if the value of HHI is greater than 1,800. As
such, the industry was highly concentrated in 2003 with HHI of 5528. Afterwards, the
HHI kept on declining, as Unilever kept on reducing its market share, and introduction
of Tetley in Pakistan. In 2010, Tetley acquired 4% market share in the Pakistani industry.
In 2018, the HHI reached to 3886. The trend shows that the industry is highly
concentrated, which gives market power to the existing players. However, it should be
kept in mind that the successful exercise of market power depends on a number of
factors besides the market share or concentration. For instance, in the case of tea
industry, the ability to abuse market power is restrained by a large informal sector.
Consumers particularly those having less loyalty to the premium brands can switch to
cheaper available open tea.
________________________

20
5. Price Trends

Generally, the tea prices are higher in Pakistan than in the neighboring countries such as
India, Sri Lanka and Bangladesh, who are tea producers as well.11 Since tea is a highly
import oriented industry, the price of the product is influenced by international prices,
taxes, and currency value. The correlation between the selling price of branded tea in
Pakistan relative to the international price and exchange rate explains the simultaneous
price changes by the branded tea companies. This correlation may be more evident by
observing the wholesale price of the product, as brands usually try to keep their prices
stable by absorbing some of the fluctuation. Our working shows that Tapal and Lipton
absorbed the fluctuations in the import price and the exchange rate much better than the
Vital and Tetley (which left later on). It has been observed that the prices went up because
of the increase in dollar exchange rate only in August 2015, when the exchange rate
increased by Rs2.34. consequently, price of branded tea increased by 9%. The increase
and decrease in the prices is because of the competitor’s prices, as is the case in most
oligopolistic markets. Companies have to maintain it as the option of switching is there.
Brand loyalty is something that keep these companies keep on running. During the survey,
the urban consumers indicate inelastic demand for value added product (s) such as tea
bags.

However, the price comparison in Table 1 shows that Lipton already priced its products
higher as compared to Tapal and the loose tea. Hence, Lipton did not have to increase the
price whenever there was a compulsion to do so for others. It also appears that Tapal was
able to capture a larger market share as compared to Lipton owing to its pricing strategy,
the last row in the following Table is for reference here. The Table also shows that the
price differential between Lipton and Tapal has narrowed down over the years.

11
For instance, at the end of FY12, the per kg price of tea in Islamabad was Rs. 710 compared to Rs. 544 in
New Delhi, Rs. 363 in Dhaka, Rs. 425 in Colombo and Rs. 469 in Kabul.
http://www.finance.gov.pk/survey/chapter_12/07-Inflation.pdf.

21
 Table 5: Tea Prices from 2014-2018

2014 2015 2016 2017 2018

Months Tapal Lipton Loose Tapal Lipton Loose Tapal Lipton Loose Tapal Lipton Loose Tapal Lipton Loose
January 772 742 556 630 653 537 876 933 636 802 874 610 880 917 634
February 715 759 541 637 671 531 878 927 629 812 883 622 895 945 638
March 658 737 541 640 678 537 809 821 605 809 821 605 939 969 651
April 656 734 537 663 722 543 797 800 599 866 971 638 956 974 662
May 606 662 521 669 729 547 794 800 600 866 993 644 956 992 663
June 593 644 518 671 751 554 794 797 595 866 997 645 967 1000 664
July 590 641 518 683 760 560 790 792 597 873 1002 646 960 1011 672
August 588 641 517 746 825 585 790 791 599 868 980 645 790 791 599
September 603 642 526 789 858 602 794 788 599 869 932 642 969 1015 672
October 617 644 529 795 868 610 794 789 597 876 919 643 975 1015 676
November 680 648 493 813 915 622 795 792 601 876 919 644 979 1025 678
December 622 648 544 842 929 632 802 862 602 876 921 644
Yearly Avg. 642 679 528 715 780 572 809 824 605 855 934 636 933 968 655
Source: Pakistan Bureau of Statistics - Monthly Bulletin of Statistics

22
Figure 8: Tea Prices of Lipton and Tapal (Rs/kg)

Lipton + Tapal
1100.00

1000.00

900.00

800.00

700.00

600.00

500.00
July

July

July

July

July

July

July
October

October

October

October

October

October

October
April
April

April

April

April

April

April

April
January

January

January

January

January

January

January

January
2011 2012 2013 2014 2015 2016 2017 2018

Lipton Tapal

Source: Pakistan Bureau of Statistics

Figure 9: Packaged and Loose Tea - Price Comparison

1000 (Rs per kg)

900 1000

800 900

700 800

600 700

500 600

400 500

300 400
2014 2015 2016 2017 2018
2014 2015 2016 2017 2018
Tapal Lipton Loose
Packaged Loose

Source: Pakistan Bureau of Statistics

23
According to the Pakistan Bureau of Statistics, the average price of loose tea was Rs.
528/kg during 2014 that increased to Rs. 650/kg in 2018. On the other hand, the packaged
tea price was Rs662/kg in 2014, which increased to Rs. 924/kg in 2018. It shows that the
price of loose tea increased by 23% whereas that of the packaged tea increased by 43%.
Price of Tapal increased by 44% and that of Lipton by 41%. This depicts the impact of
higher concentration level and marketing. From the above data, it appears that there is a
widening gap between the prices of loose and branded tea. Price for loose tea also
increased in this duration but at a slower rate. However, we have no evidence of any
collusion or cartel between branded tea marketing companies to charge higher prices. As
a strategy, Tapal has managed to capture greater market share and then has raised price
over the years. Tea of every kind is easily available and no shortage of the commodity was
noted during the survey.

5.1 Statistical Analysis for Tea Prices in Pakistan:

In order to see as to how international developments affect tea prices in Pakistan, the
prices of packaged tea and loose tea have been taken as dependent variables (Y), and
Kenya tea auction prices (in PKR) and US$ exchange rate as independent variables (X). To
estimate the coefficients of independent variables econometric technique Ordinary Least
Square (OLS) has been applied. For this analysis, the data is taken for the year 2011-2017
from Pakistan Bureau of Statistics and Tea board of Kenya.

No. Variable (Y) Variable (X) Coefficient T-value P-value

1. Packaged tea price (PKR/kg) Kenya Tea Price 2.02 4.86 0.005

2. Packaged tea price (PKR/kg) USD exchange rate 13.12 3.64 0.02

3. Loose tea price (PKR/kg) Kenya Tea Price 1.15 8.20 0.0004

4. Loose tea price (PKR/kg) USD-exchange rate 5.61 3.10 0.03

24
According to the results, if Kenya tea auction price increases by Re.1, the price of
packaged tea will increase by Rs2.02. It appears from the data that high demand in winter
season might be the reason for some price increases. Moreover, domestic tea prices also
increased due to the hike in Kenya tea prices during the last few years.12 Companies’
behavior to increase prices is not justified at some other points in time, when world tea
prices were declining. In 2017, price of Kenya tea increased, which lead packaged tea price
to increase by Rs 78.
The above results indicate that Re1 increase in the US $ will lead to an increase of Rs13 in
packaged tea price. Rise of dollar exchange rate from Rs 86 to Rs 105 could be the reason
behind this price increase. Furthermore, if there is an increase of Re1 in Kenya tea auction
price, the price of loose tea will increase by Rs1.15. Likewise, if there is an increase of one
unit in the dollar rate, the price of loose tea will increase by Rs5.60, which is less than half
of the packaged tea price increase.

12
See, for instance: ‘Tea prices raised by up to Rs100 a kilo’, March 12, 2018, available at:
https://www.dawn.com/news/1394645, and https://www.thenews.com.pk/print/70946-tea-price-rises-
up-to-rs856-per-kg

25
6. Tea Trade

According to FAO, Pakistan is amongst the top 7 countries, where tea consumption has
increased significantly. Pakistan recorded a massive increase of 36 percent in per capita
consumption of tea from 2007 to 2016. The annual per capita tea consumption in the
world is 0.75 kg. Whereas, Pakistan’s per capita tea consumption remains about 1.01 kg
per annum,13 almost all of which is imported (Table 6). The period of 2014-2018
represents an estimated import growth of 40%, which is very high.14 Pakistan’s exports
represented a negligible value, compared to its imports. The exports were driven by Tapal,
which blended various imports and then exported its branded blends. Also, Pakistan
exported black tea processed at NTHRI during current spring season (1 ton) and green tea
(2.5 tons) to Royal world Co. Akasaka, Tokyo, Japan.

Table 6: Total Import in $/kg

2013 2014 2015 2016 2017

Kenya 2.98 2.51 3.17 2.67 3.16

India 1.73 1.31 1.33 1.37 1.49

Rwanda 2.71 2.32 2.85 2.45 3.06

Tanzania 2.49 1.89 1.72 2.00 2.01

Burundi 2.65 2.37 3.19 2.29 2.85

Vietnam 1.38 1.48 1.21 1.13 1.23

China 0.95 0.89 0.90 0.72 0.66

Indonesia 2.34 2.07 2.15 2.37 2.51

Others 2.47 1.56 2.14 1.43 1.57

Source: Pakistan Tea Association

13
http://en.wikipedia.org/wiki/List_of_countries_by_tea_consumption_per_capita
14
Pakistan Economic Survey 2014 and 2018

26
One of the factors determining the international competitiveness of an industry is the
demand conditions that it faces. If an industry is challenged by consumers having
sophisticated demand, this serves as a stimulus for further innovation and improvement
to satisfy this demand. Pakistan’s own large consumer market allows for companies to
perfect their product offerings for the domestic demand. The expertise built in this
process can be used to expand further beyond the country, where the companies can also
compete fairly in the absence of smuggling.
Table 7: Statistics of Major Tea Auctions in US$/Kg

Auction Center 2013 2014 2015 2016

Chitagong 2.72 2.19 2.41 2.55
Cochin 1.94 1.66 1.55 1.74
Colombo 3.44 3.56 2.99 3.22
Guwahati 2.27 2.32 2.16 2.05
Jakarta 1.98 1.66 1.56 1.62
Kolkata 2.72 2.65 2.47 2.41
Limbe 1.82 1.43 1.56 1.55
Mombasa 2.41 2.03 2.73 2.29
Source: Computed from ITC website

Table 8: Kenya Tea Auction Prices (USD/kg )

2013-14 2014-15 2015-16 2016-17

2.24 3.56 2.69 3.81
2.20 3.14 2.47 3.72
2.23 2.91 2.38 3.62
2.38 3.08 2.64 3.56
2.57 2.96 2.87 3.83
2.49 2.70 3.20 3.69
2.46 2.43 3.44 3.37
2.35 2.43 3.54 3.29
2.22 2.56 3.92 3.05
2.31 2.33 3.71 2.98
2.48 2.36 3.87 2.76
2.56 2.32 4.03 2.80
Average=2.37 2.73 3.23 3.37
Source: https://ycharts.com/indicators/kenya_tea_auction_price

27
 Figure 10: Trend in Mombasa/Nairobi Tea Prices (USD/kg )

3.5

2.5

1.5

1
Jul-96

Jul-09
Jun-95

May-07
Jun-08
May-94

Aug-97

Nov-00
Dec-01

Apr-06

Dec-14

Apr-19
Sep-98

Jan-03

Aug-10

Nov-13
Feb-04
Mar-05

Sep-11

Jan-16
Feb-17
Mar-18
Oct-99

Oct-12
Source: https://www.indexmundi.com/commodities/?commodity=tea&months=300

Pakistan imports black tea from several countries, the most important of which are Kenya,
India, Sri Lanka, Burundi and Rwanda. Kenya alone supplies more than half of the black
tea imported in Pakistan annually.15 The trend in auction prices is shown in figure No. 10
from 1994 onward. About 40% of Kenya’s tea exports are shipped to Pakistan. As per the
Kenya’s export data, in 2018, Pakistan imported 178 million Kgs. from Kenya at a cost of
US$550 million.16

Given its high dependence on imports, prices in Pakistan are highly exposed to the
fluctuations in international supply, especially since almost half of its imports are from
Kenya. Any fluctuation in the supply of tea from Kenya due to political reasons or weather
conditions affects prices in Pakistan. While traders do substitute Kenyan tea with that
from India and Indonesia, the quality of the tea acquired from these sources is considered
inferior to that of Kenya, making it difficult to replace a particular variety with a substitute.

15
http://www.pakistanteaassociation.com/statistics.html
16
At the exchange rate of Kenyan Shilling to US$.

28
The limited substitutability due to difference in taste explains why certain types are
favored by certain countries: for example, the Russians and former Soviet republics favor
Indian and Sri Lankan tea. The consumers in the UK and Pakistan prefer Kenyan tea.17
Another reason for Pakistani importers’ preference for Kenyan tea is the supply of bulk
tea with limited value addition that makes it a cost-effective option. In view of this
preference, any disruption in the supply of Kenyan tea results in squeezing the margins of
suppliers and making the local prices volatile.

6.1 Factors Affecting Imports

An examination of trend demonstrates the impact of various factors on the import of tea
in Pakistan. Accordingly, a 1% change in GDP, population growth, and import duty would
change tea import by 1.16%, 1.18% and -0.01%, respectively. Another interesting
observation is the 1.29% increase in imports as a result of a 1% increase in consumption.
In the absence of any significant export of tea blends from Pakistan, this outcome seems
strange; however, it may be explained due to the relative difference in tea quantities in
the data for consumption and imports. The consumption data included the tea that is
supplied through smuggling while the import data does not. As a result, the quantity
consumed is more than the import volume, even though imports are the only legal
channel for available tea. Since the model does not distinguish consumption of legal
versus smuggled tea, the smaller quantities of import show a higher percentage change
compared to bigger quantities of consumption. The absence of any significant legal
exports or trends of smuggling of tea out of the country reinforce this view. The output
of this model indicates the existence of a parallel market along with legally imported tea
that is serving the tea demand. Therefore, long-term sustainability of the industry
requires that the smuggled tea be brought into the folds of legal trade.18

17
http://southasiainvestor.blogspot.com/2009/12/tea-can-become-economic-stimulant-in.html
18
‘Import elasticity of tea: a case of Pakistan’, by Rana Ejaz Ali Khan and Tanveer Hussain. This study
conducted by the Department of Economics, Islamia University does not look into the impact of exchange
rate variation on tea imports. Available at: http://mpra.ub.uni-
muenchen.de/34793/1/MPRA_paper_34793.pdf

29
6.2 Tea Smuggling

A major threat to the tea trade is smuggling. Under the Afghan Pakistan Transit Trade
Agreement (APTTA), Afghanistan’s tea import lands at Pakistan’s port. Since this tea is
meant to cross the border and enter Afghani markets, no taxes are collected from these
imports. The product then leaves the port, but instead of crossing the border, it pours
back into the Pakistani market, particularly into the towns of the province of Khyber
Pakhtunkhwa (KPK). The Afghan imports submit a bank guarantee to pay any applicable
taxes on the product, if there is evidence that it has not crossed the border. However,
even after crossing the border, the border’s porous nature allows the product to be
transported back and sold at a lower price in Pakistani markets.19 Such an arrangement
creates the opportunity for corruption and is harder to control.

Figure 11: Tea imports under ATTA/APTTA in Packages exceeding three Kgs.

Note: HS Code 90240 Black Tea, the value of imports through transit trade has been
highlighted in blue, and exports to Afghanistan in pink.
Source: Pakistan Business Council, 2016

Table 9: Value of Tea Imports

Source: Pakistan Business Council, 2016

19
http://www.nttfc.org/reports/APTTA-Final-Signed%2028102010.pdf

30
Afghanistan is a country of green tea drinkers but from 2011 onwards, the black tea has
remained one of the top imports under APTTA. There seems to be substance in allegations
of black tea smuggling through APTTA. It is interesting to note here that till 2011 i.e. when
APTTA was implemented, the value of black tea import was significantly less than the
international prices and Pakistan’s import price. The price of black tea imports under
APTTA was a bit more than the price quoted by trading partners for exports to
Afghanistan, even then it was 18% less than Pakistan’s import price. This shows the
element of under- invoicing in imports.

Figure 12: Black Tea Imports under ATTA/APTTA in Packages not exceeding 3 kgs.

Note: HS Code 90230

Source: Pakistan Business Council, 2016

Black tea is among the top imports of Afghanistan via APTTA. Most of the tea imported
via APTTA is black tea in packets exceeding 3 kg. Though, the import quantity of black tea
under this HS Code is not significant for Pakistan, the price differential, between the per
kg cost quoted by Afghan importers, the per kg cost quoted by international exporters to
Afghanistan, and the per kg cost of Pakistan’s imports, was quite significant in 2015.

NATO related cargo is scanned for security reasons at Chaman and Torkham borders.
However, at present for transit trade commercial cargo, there are no scanners at the
border. Container scanners can prove to be an essential enforcement tool in the long-
term that discourage the illegal trade. Under the UN conventions, Pakistan cannot
determine or influence the quantity of tea to be imported by Afghanistan. However,
under the national economic interest clause, the other contracting party can be sensitized

31
through formal complaint by the Foreign Office. The role of the Ministry of Commerce is
central here. In other case, if the cost of legal tea is brought down enough to become
equal to the cost of smuggled tea, the illegal business would become unprofitable and the
practice may be eliminated without significant enforcement costs.

Table 10: Legal Imports vs. Smuggled Tea

2008 2009 2010 2011 2012 2013 2014

Legal Imports 96,237 84,745 104,768 122,530 126,796 145,688 156,702
Estimated
44,300 52,982 63,565 51,081 60,714 59,763 58,337
Smuggled Tea*
Total Tea in the
140,537 137,727 168,333 173,611 187,509 205,451 215,039
market
(Tonnes)
Smuggled as a
32 38 38 29 32 29 27
percentage of
total
Source: Based on data provided by the Pakistan Tea Association
* Authentic data on tea smuggling is not available.

Legal imports are subject to the following taxes:20

 Port and clearing charges =9%

 Sales tax =17%
 Custom duty =13%
 Withholding value-added tax =3%21
 Additional sales tax = 0.5% on commercial importers

Based on the above, the cost for legal imports is higher than the smuggled tea. 22 A price
difference is a significant competitive disadvantage to honest importers.

20
For various types of taxes, the source is FBR.
21
According to PTA, for industry the rate is 5%.
22
This differential can be explained by following the calculation: (import price*custom duty)= 110% import
price. Calculating further: (Import price*custom duty)+[(import price*custom duty)*sales tax]= 127%

32
In addition to distorting the market by offering lower prices, smuggling also contributes
to increasing the import price for honest importers. During the bidding process, a legal
importer would quote a bid after accounting for tax payable and, thus calculating the final
sale price that a particular tea can be sold at in the domestic market. Since a smuggler
does not need to add taxes to the price, a smuggler can quote a higher price and thus not
only out-bid the honest importer, but effectively push up the price of tea at the auction,
as a result hurting end consumers.

Smuggled tea is sold in the cities in open sacks, which can be easily adulterated. Gram
husk, dyed saw dust and wood shavings are used for adulteration. On the one hand,
smuggling is affecting government revenue at the customs stage, and on the other, it is
threatening the health of the population with products that can be harmful to health. The
exchequer loses about billions annually due to the smuggling of tea.23

The government of Pakistan, once in 1996 and then again in 2000, prepared a negative
list of products that were not to be traded under ATTA, which included products that did
not have much consumption in Afghanistan and were likely to be smuggled back into
Pakistan. While reviewing this list in 2004, the ban on black tea was removed, along with
13 other products.24 This action needs to be reviewed, given the current circumstances.
The terms of the agreement should be used to address the problems it has caused in the
form of smuggling.

Currently, the Afghan imports have an advantage over Pakistan’s legal imports due to the
fact that they are not required to pay any taxes on landing. The product imported for
Afghanistan leaves the port without paying any of the taxes that are collected from local
imports, but ends up being sold in the same local market along with legal imports. The

import price. Next calculation involves: [(import price*custom duty)*sales price]+ [(import price*custom
duty)*sales price]*withholding value-added tax = 131.4% import price. This gives us: Cost addition= after-
tax value-import price= 131.4% import price-100% import price= 31.4% import price
23
http://weeklypulse.org/details.aspx?contentID=69&storylist=16
24
http://www.dailytimes.com.pk/default.asp?page=story_12-4-2005_pg5_10

33
cost of tax automatically puts the local importers at a disadvantage compared to the
smuggled product.

6.2.1 Curbing Smuggling

Possible solutions to reduce and eliminate smuggling of tea are discussed in the
paragraphs below:

6.2.1.1 Decrease cost of legal imports by reducing tax

On the insistence of the tea industry, the government reduced the sales tax applicable to
tea from 16% to 5% through SRO 608(I)/2012 on 1st June 2012.25 Within 9 months, on
February 28th 2013, this decision was reversed, and the sales tax rate was brought back
to 16% through SRO number 153(I)/2013.26

Table 11: Effective Tax Burden at Sales Tax of 17%, 16% and 5%

Post FY14 Budget Higher Sales Tax Lower Sales Tax

Import Price 100 100 100
Custom Duty 10% 10% 10%
After Custom duty
price 110 110 110
Sales Tax 17% 16% 5%
After Sales tax price 128.7 127.6 115.5
Withholding value-
added tax 3% 3% 3%
After withholding value
added tax price 132.56 131.43 118.97
Cost of Taxation 32.56 31.43 18.97
Source: Pakistan Tea Association and FBR for rates of various duties.

While the fall in sales tax did reduce tea prices and curbed smuggling (25% decrease
month-on-month in July 2012), it did not solve the problem entirely. The incentive for
smuggling increases with increase in international prices of tea or depreciation of the
Pakistan Rupee. Due to unfavorable weather in Kenya towards the end of 2012,

25
http://download1.fbr.gov.pk/SROs/20126218629303608(I)2012.pdf
26
http://download1.fbr.gov.pk/SROs/20133113358513472013SRO153.pdf

34
international tea prices increased, which greatly limited the benefit of tax reduction in
eliminating smuggling.27

6.2.1.2 Reduce the impact of international prices and exchange rate on smuggling by
using a combination of low sales tax and absolute taxation per unit sold.
The major reason for high taxation of this product is the need for revenue by the
government. While high taxation allows greater revenue collection on legal trade, it
creates an opportunity for creation of an illegal, untaxed trade, which reduces the
volumes of the taxed tea. As smuggling drives legal imports out of business, it not only
hurts the consumers who may be supplied low quality product but also causes losses to
the government. The government needs to take serious steps to curb this smuggling to
give the industry a level playing field to compete on. Another possibility, which can be
explored, is the introduction of absolute taxation on each unit of tea sold. This way, the
tax cost of legal tea will not be influenced by exchange rate or international price
fluctuations.28 As a result of less volatility of legal trade, the profit margins of smuggling
may be reduced.

27
http://www.brecorder.com/agriculture-a-allied/183/1232625/
28
Presently, the taxes that the government collects from tea sales e.g. sales tax, import duty, etc. are levied
ad-valorem i.e. on the value, in percentage terms.

35
 Table 12: Estimated Tax Revenue Lost due to Smuggling

A B C D E F G
Smuggle Loss of
product withholding
Value Loss of value-added
(Mln Custom’s Loss of Sales Tax (Mln Total
Months Smuggling Price Rs.= Duty (Mln Tax (Mln Rs.= Rs.= Loss (Rs.
in 2012 (Tonnes) (Rs./Tonne) A*B) Rs.=C*10%) (C+D)*ST16%) (C+D+E)*3%) In Mln)
Mar 2,632 236,670 622.96 62.3 109.64 21.59 193.52
Apr 8,060 252,550 2,035.49 203.55 358.25 70.53 632.32
May 4,921 238,410 1,173.32 117.33 206.5 40.66 364.49
Jun 4,101 266,030 1,090.87 109.09 60 37.8 206.88
Jul 4,190 263,320 1,103.43 110.34 60.69 38.23 209.27
Aug 8,173 249,590 2,039.91 203.99 112.2 70.68 386.87
Sep 5,198 285,710 1,485.23 148.52 81.69 51.46 281.67
Oct 3,185 295,540 941.29 94.13 51.77 32.62 178.52
Nov 5,655 278,870 1,577.04 157.7 86.74 54.64 299.09
Dec 5,349 277,530 1,484.62 148.46 81.65 51.44 281.56
Source: Pakistan Tea Association29

Table 13: Estimated Tax Revenue Lost due to Smuggling in 2016-17 & 2018

NET KGS ATTA NET KGS 80% ATT US$ *3.10 40% DUTY Pak Rs.
(M.Tons) EXP *103.30
ATT 2016
62616583 50,093,266 155,289,126 62,115,650 6,416,546,680

ATT 2017
40% DUTY
NET KGS 80% ATT US$ *3.10 EXP Pak Rs. *107
60014671 48,011,737 148,836,384 59,534,553 6,370,197,217

ATT 2018
40% DUTY
NET KGS 80% ATT US$ *3.10 EXP Pak Rs. *122
63896331 51,117,065 158,462,901 69,723,676 8,506,288,506

29
ITC Booklet on Smuggled Tea. http://www.inttea.com/

36
The above table shows that the approximate revenue lost due to smuggling comes out to
be huge. These figures are indicative at best, as exact data on the quantity and value of
smuggled tea is not available.30 The taxes and duties on legal imports are:
• Port clearing charges = 9% of value of import, paid at the time of import
• Customs duty =11%, paid at the time of import
• Withholding tax = 5.5% for filer 9% on non-filer on the value of import (paid at the
time of import)
• Value added tax = 3% paid at the time of import
• Regulatory duty = 1% paid at the time of import
• Sales tax = 17% (at the time of sale in Pakistan)

An interesting example of eliminating tea smuggling can be found in the history of the UK.
Until 1780, smuggling was so widespread in the UK that virtually all the tea consumed was
smuggled. The conditions for smuggling were perfect because of high custom duties
applied in the UK. The East India Company was the monopoly supplier of legal tea;
however, the cheap availability of smuggled tea forced it to dump its surplus in American
markets. It was finally acknowledged that the only way to reduce smuggling was to make
tea cheaper by reducing applicable duties. So the East India Company, through its
powerful allies in the British Parliament, lobbied for the duty to be lowered. The
Commutation Act of 1784 reduced the tax on tea from 119% to 12.5%, rendering the
smuggling of tea unprofitable. As the smuggling trade became unfeasible, the previously
smuggled quantities of tea came under the tax net so that even with the reduced rate of
tax, the amount of revenue collected from tea was soon restored.31

In the case of Pakistan, tax evasion is another challenge faced by this industry. The major
tea companies in the industry forwarded a recommendation to the Customs Authorities,

30
To estimate loss on account of smuggling for the year 2013 and 2014, Kenya auction price without
transportation cost has been used, which gives minimum estimated loss.
31
http://www.tea.co.uk/tea-smuggling.

37
proposing that a fixed minimum price be set for every exporting country on which tax due
would be calculated. Even if tea was procured at a lower price, the tax would be calculated
on the fixed minimum price. And if the import price was higher, the tax would be
calculated on the higher price. The justification of this proposal was to ease
documentation and reduce false declaration, as the tax would be calculated on a known
fixed price.

At present, the tax calculation is based on the monthly average price of tea from each
particular source garden or each particular variety. Each country has a number of tea
gardens and each garden produces a number of tea types based on processing. Pakistan
Tea Association shares the average monthly prices to be used for the tax calculation on
its website. This price may not necessarily be the one at which the tea was bought. The
average price is used to ease documentation and calculation of taxes due. It is alleged
that this system is exploited by importers by making false declarations about the quality
of tea and, thus, the applicable price for tax calculation.

While the proposed system of fixed minimum price may overtax low cost tea, it will
contribute to reducing tax evasion due to under-invoicing. Since the tax calculation will
depend on the source country, checking for tax evasion may become easier. The
mechanism for calculation of this minimum price and the frequency of its issue is,
however, vulnerable to manipulation and may create opportunity for collusion. A very
low fixed minimum price would be ineffective to discourage under-invoicing and a very
high price could increase the cost of import. To avoid any manipulation of this price, a
formula determining the minimum fixed price could be agreed upon by all stakeholders.

_________________

38
7. Tea Production in Pakistan

Tea is a cash crop and a labour intensive activity, which can boost farm income by 4 to 6
times. This would not only improve socio-economic condition of the people, but also save
foreign currency by reducing the import of this product.32

7.1 Tea Growing Initiatives

The first tea growing experiments were initiated in the then West Pakistan (presently
Pakistan) in village Baffa (district Mansehra, KPK) under the auspices of Pakistan Tea
Board in 1958. These efforts were not followed up because tea production in the then
East Pakistan (now Bangladesh) met the needs of the nation. Subsequently, efforts to
grow tea were reinitiated in 1964 at Misriot Dam near Rawalpindi, but due to unfavorable
soil and climatic conditions, they could not achieve the desired results. The high import
bill of tea for a developing country like Pakistan became a great problem, therefore, soon
after the separation of East Pakistan in 1971, a cell of special crops was created in the
Ministry of Food and Agriculture, Government of Pakistan, and a project titled “Research
and Introduction of Tea in Pakistan” was initiated in 1973-74. Later on, the project was
handed over to the Pakistan Agriculture Research Council (PARC), Islamabad. The
National Tea Research Station (NTRS) was established in 1986 at Shinkiari, District
Mansehra, which was later upgraded to the National Tea Research Institute (NTHRI).
As a result of these efforts, about 60,000 hectare of land was identified to be suitable
for tea growing in Mansehra and Swat districts based on topography, soil and
climatic. The potential tea growing areas are located in Hazara and Malakand Division
in the Khyber Pakhtunkhwa Province (KPK) (Figure 12). In Hazara, the area is located
in districts of Mansehra, Battagram and Abbottabad, while in Malakand it is in Swat.
These areas are in a close belt nestled in the foothills of the Himalayas in the
northeast and Hindu Kush in the northwest at 35o north latitude and between 72-75o

32
http://www.aup.edu.pk/sj_pdf/THE%20ROLE%20OF%20NTIONAL%20TEA%20RESEARCH%20INS
TITTUTE%20IN%20TEA%20PRODUCTION.pdf

39
east longitudes and are located in these districts at altitudes ranging from 1000-1500
meters above sea level with varying soil pH ranging from 5.6 to 6.5. In the Southern
parts of prospective tea growing areas, summer monsoon provides the rainfall in a
sub-tropical monsoonal climate, whereas in the Northern parts, there is significant
rainfall both in winter and summer, and the climate is continental Mediterranean.
The mean annual rainfall is with average of 1000 to 1200 mm at below 1400 m
altitude and 1200 to 1400 mm at higher altitudes. The mountains have their own frost
pockets and microclimates. The zones below 1500 m elevation is the prospective tea
growing areas as they are humid, sub-tropical and the annual rainfall is >1000 mm
having average temperature> 100C during at least eight months in a year.

Meanwhile, as part of terms to allow Unilever’s acquisition of Brook Bond, the then
competition authority in Pakistan, Monopoly Control Authority, required Unilever to
invest in tea-growing programs in Pakistan. Unilever Pvt. Ltd. also entered into the tea
plantation business in the same area, and established Unilever Tea Experimental Station
during 1986. The company planted tea on 1,060 acres (420 ha) on farmers’ land and
installed a black tea processing plant with a capacity of one ton processed tea in 2001.
However, due to climatic and resource availability challenges, Unilever’s success in tea
farming was limited. While the Government of Pakistan tried to commercialize tea
plantation through the Public-Private Sector in prospective tea growing areas, the
projects were suspended after the devolution of Ministry of Food and Agriculture. 33

7.1.1 The Role of National Tea and High Value Research Institute (NTHRI)
NTHRI (previously NTRI) oversees and facilitates the tea plantation operations in Pakistan.
It works as an outstation office of Pakistan Agricultural Research Council (PARC), which
comes under Ministry of Food Security and Research. PARC has outstations in different
areas that specialize in various crops.

33
http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/business/15-Apr-
2012/planning-commission-s-no-to-funds-for-devolved-projects

40
 Figure 13: Topographic sketch for tea growing area in Pakistan

Source: NTHRI

According to NTHRI, Pakistan has a great potential for profitable investment in the
cultivation, processing and marketing of black tea. The samples of black tea cultivated
and produced in Pakistan were sent to world-renowned companies, including Tea Craft
Company, for conducting quality tests. These companies have found the Pakistani tea to
be of a good quality.34 According to NTHRI, the cost of tea production in Pakistan in 2010
was Rs193.65/kg. The average import price per kg for the same period is Rs 202/kg. This
shows that local production of tea might be an investment option, which could substitute
the imported tea for a lower price. It could also be offered for export to countries that
approve of the taste of domestically produced tea.

Kenya, one of the biggest producers of tea, consumes only 6% of its total production. Due
to favorable climatic conditions, it is able to profitably produce and export excess tea to
other countries. Pakistan has the potential for tea production that can contribute to the
economy by import substitution or exports, once it has achieved economies of scale. At
current estimates, the tea cultivation can contribute 60 percent of tea import bill towards

34
http://www.aup.edu.pk/sj_pdf/THE%20ROLE%20OF%20NTIONAL%20TEA%20RESEARCH%20INS
TITTUTE%20IN%20TEA%20PRODUCTION.pdf

41
farm income. At least one third of this, will directly reach to farm labour. Hence, there is
potential of providing employment to un-skilled labour. Besides, the establishment of
processing factories will also contribute towards industrialization of backward rural areas
and provide additional opportunities for industrial employment and downstream
business.

A long-term vision and a strategic plan to reach this vision are important to achieve the
goal of a profitable tea production. Suitable areas like district Mansehra and Battagram
can be made tea-producing clusters to strengthen competitive forces and ensure
efficiency. By using the region’s comparative advantage in tea production, not only will
we be able to improve the socio-economic condition of the population, but we can also
diversify our agricultural output. Experts at NTHRI are of the view that after successful tea
growing in Pakistan, now constituting a statutory body may be helpful to safeguard
interests of tea growers, processors, private investors, and research organizations, as is
the practice in other tea producing countries.

7.2 Crop Characteristics

 Tea crops are identified based on three major characteristics: Aroma, Taste and
Color. Crops vary in all these characteristics; therefore, tea from a variety of
sources is blended to make a variety of mixtures for different consumer
preferences. This characteristic serves as a strength for the crop, because even if
the crop does not substitute imports in Pakistan, there are markets internationally
for which Pakistan can supply its product and earn foreign exchange.
 The crop can be used for both green and black tea production, since the plant is
the same and the different products are produced through different ways of
processing. This offers wider opportunity for the crop.
 After the initial investment, until the plant matures (4-5 years), the cost of
maintenance of the crop decreases. It only requires periodic cutting, pruning and
application of fertilizer. Therefore, the initial investment can give returns for
almost 120 years.

42
  A challenge faced by farmers is that due to small holdings, they are unwilling to
dedicate land to a tea crop that would take years to mature.
 The tea leaves must reach the processing facility within 4 hours of plucking, thus
requiring essential infrastructure close to the farms.
 Since there is not a formal market for the tea crop, the farmers are not certain of
being able to sell their product. The only buyers could be NTHRI or Unilever
through buy-back agreements, since they are the ones who have processing units
in the vicinity.
 Access to power is a major factor influencing the crop processing. The cost of
processing also influences the willingness of buyers, adding to the uncertainty of
a sale.

7.3 Land

Most of the land suitable for tea plantation is located in Mansehra’s hilly terrain, parts of
Swat, FATA and AJK. In order to promote tea production, the government has to play a
catalytic role by forming facilitating policies. To bring about an increase in tea production,
a commercialization project through public-private partnership was initiated. Three major
private sector enterprises, M/s Qarshi Foundation, M/s Khawaja Foods Kashmir (Pvt) Ltd.
and M/s Neelum Plantation (Pvt.) Ltd., were to participate in the project. The companies
signed an MOU with AJK Government on 2nd May 2005, which was followed by the signing
of a formal leasehold agreement on 24th May 2007.

The parties in the investor group also met the Government of KPK in March 2007 and
agreed to provide 3,000 acres of suitable reserved denuded forestland in district
Mansehra. For this project, the Forest Departments in KPK and AJK had to lease out 1,000
acres each to three private companies for tea cultivation. These companies had to provide
job, health care and education to local people in their respective areas.35

35
http://dawn.com/2011/08/15/agriculture-and-technology-tea-project-delayed/

43
The project was an excellent opportunity to transition domestic production from research
and pilot phase mode to private sector led commercial production, processing and
marketing. According to the plan, the investors would train and encourage local
landowners and farmers to set up tea sapling nurseries in their holdings on a guaranteed
buy back agreement basis. The investors would also establish tea-processing units after
tea plantations were set up in the area at a large scale. These units would buy all the raw
green leaf produced by the private farmers in the area. The National Tea Research
Institute at Shinkiari (Khyber Pakhtunkhwa) would provide technical knowhow and the
group would also start tea research stations in this territory. This project would have
profitably utilized denuded forestland and wasteland, while adding more diversity to the
agricultural product offering of Pakistan.

In spite of minimal investment from the government, the project could not be launched
in KPK due to the refusal of the Forest Department to allow cultivation on its land. The
difficulty of acquiring land in KPK stems from the fact that the provincial government
offered the Forest Department’s land for tea cultivation; however, the Forest Department
was unwilling to hand it over to the private sector. This may be due to the forest
authorities’ own personal interests at stake, like selling the grass, trees, and giving grazing
areas to farmers.

The AJK government had also agreed to lease out 3,000 acres of forestland to a group of
three companies for 15 years for tea cultivation in the area. The land was to be leased out
against Rs 600,000 per annum, while the group of tea plantation would invest about Rs
1.5 billion over the next five years in the AJK, with no financing by the state government.36
However, even in the AJK, the project could not be executed successfully due to issues in
land allocation and security conditions. Consequently, the investors withdrew from the
project.

36
http://www.dailytimes.com.pk/default.asp?page=2010/09/05/story_5-9-2010_pg5_10

44
With the dissolution of the Ministry of Food and Agriculture, this project was closed. The
opportunity of profitable tea cultivation is being wasted due to the inability of the
government to provide the resources necessary for cultivation. To make investment in
the crop viable, land is a resource that the government must ensure is available to the
private sector for the long term. Due to small land holding of individual farmers, obtaining
such a guarantee for long-term land availability is not possible, making private investment
unfeasible. Unavailability of land at a predictable cost was one of the reasons Tapal pulled
out of tea production within a few years. Therefore, without government participation in
guaranteeing land availability, especially the culturable wasteland, to the private investor,
any growth in tea production will be very difficult.

7.4 Water

NTHRI points towards the need for effective water management in the hilly areas to store
winter rains for sprinkling during the drought season. For this purpose, mini dams in
potential tea growing areas may be helpful to avoid the chances of water scarcity in
warmer season.

7.5 Market

Due to the small volume of tea production, there is no formal tea market. Farmers cannot
sell their output to resellers or consumers. They must directly sell it to processors.
Currently, there are only two processing plants in the area of production: NTHRI and
Unilever. Both operate through buy-back agreements with farmers to purchase their
output on pre-determined rates. Such a limited buyer market makes the farmers highly
vulnerable to changes in the buying decisions of the buyers, especially in the case of
NTHRI, which depends on government funding for its operations. When NTHRI is unable
to procure their output due to high processing cost and insufficiency of funds, only
Unilever remains for the farmers to sell their product.
For the market to be more competitive, both production and processing capacity should
increase. Only if there is sufficient processed output, will there be an incentive to establish

45
a more formal market for the product. In addition, a formal market will develop because
of higher volumes. It is, therefore, important to offer appropriate incentives, and create
a long-term plan for the development of the local tea production industry.

7.6 Financing

Funds are critical for tea farming. Tea is a purely commercial crop. Farmers cannot use
any of it for their own subsistence; therefore, it is critical for them to have access to buyers
willing to whom they can sell at a sufficient profit. Financially weak farmer cannot afford
to buy required inputs. The credit, given to the tea-growing farmers of NTHRI, was
through Zarai Taraqiati Bank Limited (ZTBL).37 However, ZTBL has discontinued its supply
of credit to tea producers due to insufficient interest of farmers in a crop that has limited
sales options.

7.7 Training

The NTHRI trains farmers in nursery development, provides tea plants and guidance for
cultivation and evolves technology packages for them. It also gives inputs to farmers and
purchases their produce. It aims at self-sufficiency in tea. However, due to a shortage of
personnel and absence of extension system, it has limited outreach to farmers. The
provincial agriculture department with its staff, resources and outreach capacity could
play an active role in tea plantation.38

_______________

37
‘The Role of National Tea Research Institute in Tea Production’, Sarhad J. Agric. Vol.25, No.2, 2009.
38
http://dawn.com/2011/08/15/agriculture-and-technology-tea-project-delayed/

46
8. International Production Models

8.1 Small Holders

Small holders play an important role in the tea sub-sector worldwide. While most tea
producers started with large-scale plantations, small holders are becoming increasingly
significant contributors in total tea production. There are more than 400,000 small
holders in Sri Lanka who account for 76% of tea production, produced in 64% of the area
under tea. In Kenya, an estimated 560,000 small holders account for 62% of total tea
production. In India, the world’s second largest tea producing country and largest
consumer of black tea, an estimated 160,000 small holders account for over 26% of its
production.39

8.2 Large-Scale Corporate-Estate

The alternative plantation model is of the large-scale corporate-estate with an integrated

field and factory operation. This model still accounts for a significant share of production
in India, Sri Lanka and Kenya. Contrary to the concept of economies of scale, this is
considered a high-cost model. However, the quality of its produce is often considered
superior. The smallholder model in India is considered low-cost-low-quality production,
catering largely to the lower-end of the domestic market, while in Kenya, the quality of
smallholder tea is higher, but productivity of large-scale estates has always been above
that of the small holders.

8.3 Options for Pakistan

Small holder production is seen as an increasingly viable production model. There is a

trend towards investing in stand-alone factories and sourcing of green leaves
requirement by entities in estate sectors, from both smallholders and their own
plantations. In the past decade, the two largest blending and marketing companies in

39
FAO estimates, “Contribution of smallholders to the tea sub-sector and policies required to enhance their
livelihood”, 2012.

47
India (Unilever and Tata Tea) left the estate-sector, preferring to buy their input from
other producers.40

Considering the challenges faced by the public-private partnership large-scale production

projects, it may be more feasible for Pakistan to offer incentives to small and medium
scale enterprises to enter different stages of the value chain. Setting up small processing
plants with the participation of small holders could be more effective in attracting private
participation in the industry than large-scale projects that are subject to political
hindrances. Small holder participation in processing protects them from exploitation,
especially in the absence of regulation. Indonesia and India have dealt with the issue of
farmer exploitation by introducing regulations, which determine the relative shares of the
smallholder and the private processing factory in the revenue generated from the sale of
the made tea, based on market prices prevailing in the auction centre/primary market.
Government incentives aimed at encouraging smaller investors to set up tea facilities may
be useful in adding depth to the market, which may later integrate to widen the scale of
the production.

________________

40
http://www.fao.org/fileadmin/templates/est/COMM_MARKETS_MONITORING/Tea/Documents/IGG_
20/12-4-Smallholders.pdf

48
9. Barriers to Entry in the Market and Competition Concerns

9.1 Natural Barriers

Differential distribution of required resources like land, water, and climate, give an
advantage to certain market players and constitute natural barriers to entry.

9.1.1 Soil and Climatic Conditions

Climate related issues are the most important factors for tea cultivation. Due to climate
barriers, tea cultivation is not possible in Punjab and Sindh. The tea crop requires deep,
permeable well-drained and acidic soil having a pH ranging from 4.5 to 6.5.41 It is usually
grown on sloping land. However, it can be grown on leveled land with good drainage. The
water requirement for tea is comparatively higher than most other crops. For a luxuriant
crop, an annual rainfall above 1,000 mm is required, while intermittent rainfall
throughout the year greatly enhances its growth and production. Temperature is another
important factor for tea cultivation, where optimum temperature for tea growth ranges
from 12°C to 30°C. Temperatures below freezing and above 35°C greatly hamper tea
growth.

9.1.2 The Socio-economic Conditions

Subsistence farming, surplus funds for investment and social condition of people are the
other obstacles to tea production in the region. Most of the people of the area have very
small holdings of land, usually in kanals, which is one-eighth of an acre. The farmers,
therefore, are reluctant to grow tea because it is a long duration crop and takes 7 to 8
years to reach the complete yielding stage. They prefer short duration crops like
vegetables, maize, rice, and wheat that provide a quick return to meet their daily life
expenditures. Most of the farmers are very poor, while tea requires some investment for

41
Pervaiz, U., A. Khan, N.M. Khan, M.Z.U. Khan, Ikramulhaq, Q. Khan, M. Idrees, S. Ahmad and Iftikhar
Ahmad. ‘The Role of National Tea Research Institute in Tea Production’. Sarhad J. Agric. 25(2): 349-353.
Available at:
http://www.aup.edu.pk/sj_pdf/THE%20ROLE%20OF%20NTIONAL%20TEA%20RESEARCH%20INST
ITTUTE%20IN%20TEA%20PRODUCTION.pdf

49
its cultural practices such as weeding, fertilization and irrigation. Thus, investment on tea
and poverty of the farmers is one of the hurdles for tea cultivation in Pakistan. The
farmers are unwilling to adopt this long duration crop that occupies fields the whole year.
The plant-to-plant and row-to-row distance of the crop does not permit farmers to
undertake enough inter-cropping practices, which make them more reluctant to cultivate
this crop.42

9.2 Strategic Barriers

The distribution network is an important tool that companies use to compete with other
firms. Often using anti-competitive practices at this stage, the companies may try to
exclude competitors from target markets or limit availability of their brands. One such
option can be to limit the market to which a distributor can supply tea and the price at
which it supplies. Such practice would be a violation of Section 4 of the Competition Act
2010 (“The Act”). Accordingly, an undertaking cannot enter into an agreement in respect
of production, supply, distribution, acquisition or control of goods or the provision of
services, which have the object or effect of preventing, restricting or reducing
competition within the relevant market. The prohibited agreements include fixing of
purchase or selling price, imposing any other restrictive trading conditions about the sale
or distribution of goods or provision of services, and dividing or sharing markets for goods
or services by territories, volume of sales or purchase by type of goods or services sold or
by any other means. While such clauses may limit competition between distributors, they
may be justified if the cost of loss of competitive force is less than the efficiency benefit.
In such cases, undertakings have to seek an exemption from the CCP under Section 5 of
the Act.

Tapal Tea Pvt. Ltd. sought an exemption. The company appoints distributors for specific
markets to sell their product at a price determined by the company. By limiting the market
and price, the agreement limits competition between different distributors in the relevant

42
http://www.dailytimes.com.pk/default.asp?page=2010/09/05/story_5-9-2010_pg5_10

50
market. However, to be able to supply the product to the consumer in a timely and
efficient manner, it is essential for the company to be able to operate a systematic
distribution network. By limiting the market for a particular distributor, the company
ensures timely and continuous supply to all traders at the company’s price, proper care
of stocks, in time payment to the company, submission of timely orders, claims, and
consumer’s complains. In this case, the benefits of the restriction seem to outweigh the
cost. The company applied for exemption in June 2008, which was renewed subsequently.

9.3 Regulatory or Policy Barriers

There are no barriers on the number or types of companies operating in the industry or
any licensing requirement for traders. A trader only needs a national identity card and
bank account to be allowed to import tea.

In addition to tariffs, other taxes applicable on tea result in a strong monetary incentive
for smuggling in the absence of a transparent enforcement system to ensure that Afghani
import do not enter Pakistan. The parallel market of cheaper smuggled product serves as
a barrier to entry as well, since legal importers’ sale prices become uncompetitive.

9.4 Competition Concerns

In 2012-13, the CCP conducted an inquiry into the price trends in the tea sector. The
enquiry concluded that there was no evidence of collusion between companies in this
sector. Some of the reasons for this conclusion were the following:

i. In addition to the branded tea suppliers, there are a number of tea importers who
are supplying loose tea to consumers at lower prices. Given a large number of
suppliers of tea, it is harder for the industry to organize into a cartel and reach an
agreement on price fixing, quota allocation or division of market.
ii. Entry barriers to the industry are low due to the simple criteria for eligibility to
import tea. Anyone can enter the industry; however, the presence of a parallel

51
 informal market of cheaper smuggled tea does greatly influence the incentive to
enter the market.

We are of the view that due to a high demand, the competition in the tea market has
remained fierce. The companies in the formal sector face a tough competition as
consumers have a choice to switch to unbranded unpackaged loose tea over branded
packaged tea. To create brand loyalty, product differentiation and advertising are used.
However, price hikes, though may be for short periods, should closely be monitored for
possible explanations.

Some incidence of ‘deceptive marketing practice’ in the form of fake tea packaged as
branded tea was found, also some consumers of the loose tea reported adulteration. While
adulteration in food products is covered under separate legislation, the deceptive
marketing issue needs attention of the CCP. Any case of deceptive marketing can be
brought into the knowledge of the CCP by the district food officers, district administration,
and food authorities, who deal with the issue at the local level. There is a need to formulate
a mechanism of information sharing between the CCP and district administration’s
functionaries through advocacy and outreach activities of the CCP targeting provincial
governments.

Tea of various types and brands is easily available at grocery retailers and wholesalers. No
shortages have been reported. As far as future prospects are concerned, based on
population and consumption growth, the tea sales are expected to grow by 10-12%. In the
branded tea segment, the demand for tea bags is expected to grow by more than 15%.

___________________

52
10. Recommendations

10.1 Controlling Smuggling

Smuggling is the biggest threat faced by the domestic tea industry, causing loss of millions
of rupees to the government and forcing legal importers out of business. The government
must take firm action to curb the illegal trade. A combination of tax and enforcement
tools can be used to control the practice. The incentive to smuggle comes from the
difference in taxation on tea imported for Pakistan and that imported for Afghanistan.
This difference can be reduced through tariff rationalization by reducing the tax imposed
on Pakistani imports, and by increasing the cost of tea landing in Pakistan for Afghanistan.
By decreasing cost of legal imports, the smuggling trade can be made unprofitable.

10.1.1 Revisiting Transit Trade Agreement

Under the APTTA, the Afghanistan-bound tea imports land at Pakistan’s port. The product
leaves the port, but instead of crossing the border, it flows into the Pakistani market,
particularly in the towns of Khyber Pakhtunkhwa (KPK). Even if the product crosses the
border, its porous nature allows for the product to be transported back, and sold at a
lower price in Pakistan. This creates opportunity for corruption and is harder to control.
The negative list under the transit trade agreement be revisited to limit imports hurt the
domestic market. Use of the transit agreement facility for such products may be
prohibited or a limit may be applied on imports volume. Therefore, the CCP may
recommend Afghanistan Pakistan Transit Trade Coordination Authority (APTTCA),
Ministry of Commerce to take up this matter more effectively with Afghan counterparts,
to curtail black tea import that is in excess of Afghan demand. Indeed, under Article 3(2)
of the APTTA, 2010 Pakistan can lodge a formal complaint. The State Bank of Pakistan has
also recently pointed out the need to put in place an effective control mechanism through
a consultative process to curb smuggling in Pakistan under the grab of APTTA. 43

‘Afghanistan: SBP proposes massive changes in trade regime’, ‘Business Recorder, 29 July 2019.
43

Available at: https://fp.brecorder.com/2019/07/20190729501128/

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 10.2 Creation of a Tea Wing

The industry is represented by the Pakistan Tea Association. Since the membership of the
association consists mostly of tea traders, it is unable to represent challenges faced by
tea producers. Apart from the NTHRI, Unilever is the only company having experience of
tea growing in Pakistan, who is a member of the PTA as well. While a tea board existed,
it could not play an effective role in the affairs of the industry.44 The Ministry of National
Food Security and Research (MNFSR) may consider creating a ‘Tea Wing’ to devise policies
and program to encourage both production and trade of tea. The need for a statutory
organization as highlighted by the NTHRI, could be fulfilled initially by this Wing that may
be transformed to a full-fledged Board, if so needed in the long run. The Wing can perform
a broad range of functions relating to rendering financial and technical advice for
cultivation, manufacture and marketing of tea, particularly, to develop the small growers’
model in Pakistan.

10.3 Ensuring Land Availability

In the absence of any interested parties, it is understandable that we did not see a push
from the stakeholders for policy making on tea cultivation. However, KPK and AJK
governments may tap the potential for employment generation. The commercialization
of tea project through public-private partnership should be revisited with federal,
provincial and AJK governments ensuring the secure availability of land to potential
investors for tea production, and by involving smallholders as key stakeholders in the
project.

10.4 Enhancing Competition

The tea industry needs market development and documentation of businesses. The
competition in the branded tea market has remained fierce as consumers have a choice to
switch to unbranded unpackaged loose tea over branded packaged tea. However, there

44
http://www.dailytimes.com.pk/default.asp?page=story_24-7-2003_pg5_17

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should be well-justified explanations for prices increases. Competition can be enhanced by
eliminating the chances for ‘Deceptive marketing’, when fake tea is packaged as branded
tea. At a local level, information about deceptive marketing can be gathered from the
district food officers, district administration and the Food Authorities, which are
responsible to monitor quality and price of commodities in the open market.

_____________________

55
COMPETITION CONCERNS AND RECOMMENDATIONS FOR MARKET DEVELOPMENT RESPONSIBILITY PRIORITY

1. Smuggling causes unfair competition and restricts market development

 A combination of tax and enforcement tools can help control smuggling.
By decreasing the cost of legal imports, the smuggling trade can be made Government High
less attractive.
 To control selling of Afghanistan-bound tea in Pakistani market – national
interest clause in the transit trade agreement may be used to limit the APTTCA, M/O
High
import in excess of Afghan consumption, which hurts the domestic Commerce
market.
2. Tea Wing
• The task to devise policy and action plan for indigenous production of tea
Government,
and its trade may be assigned to a ‘Tea Wing’ created within the Medium
MNFS&R
MNFS&R.
3. Ensuring Land Availability
• KPK and AJK* governments may tap the immense potential for
employment and income generation through tea cultivation.
Commercialization of tea project through public-private partnership
Government Low
should be considered by federal, provincial and AJK governments.
Ensuring long term availability of land to potential investors is inevitable
for success of tea growing initiative.
Note: * AJK is not covered under the ambit of Competition Act, 2010.

56
 Annexure I

Major Producers - Tea Production Trend (mln kgs)

Country 2013 2014 2015 2016 2017
China 1924 2096 2230 2405 2550
India 1200 1207 1191 1267 1279
Kenya 432 445 399 473 440
Sri Lanka 340 338 329 293 307
Vietnam 180 175 170 180 180
Source: Supplement of Annual ITC Bulletin of
Statistics, 2015 and 2017
http://www.fao.org/3/BU642en/bu642en.pdf

Annexure II

Tea Exports Trend (mln kgs)

2017

2016

2015

2014

2013

0 100 200 300 400 500 600

Kenya China Sri lanka India Vietnam

Source: International Tea Committee

57
 References

1. Agreements between the Governments of the Islamic Republic of Afghanistan and

Islamic Republic of Pakistan, Afghanistan – Pakistan Transit Trade Agreement,
available at: http://www.nttfc.org/reports/APTTA-Final-Signed%2028102010.pdf

2. Annual Bulletin Supplement, International Trade Center, 2012

3. Booklet on Smuggled Tea, International Trade Center, available at:

http://www.inttea.com/

4. Contribution of Smallholders to the Tea Sub-sector and Policies Required to

Enhance their Livelihood, Committee on Commodity Problems –
Intergovernmental Group on Tea, Colombo, Sri Lanka, 2012, available at:
http://www.fao.org/fileadmin/templates/est/COMM_MARKETS_MONITORING/
Tea/Documents/IGG_20/12-4-Smallholders.pdf

5. Global Statistics Report, Tea Board of India, Government of India, available at:
http://www.teaboard.gov.in/pdf/Global_Tea.pdf

6. ‘Import elasticity of tea: a case of Pakistan’, by Rana Ejaz Ali Khan and Tanveer
Hussain, Department of Economics, Islamia University, available at:
http://mpra.ub.uni-muenchen.de/34793/1/MPRA_paper_34793.pdf

7. Intergovernmental Group on Tea – 20th Session, Food and Agriculture

Organization, Colombo, Sri Lanka, 2012

8. Newspaper Articles, available at:

http://www.dailytimes.com.pk/default.asp?page=2012%5C06%5C19%5Cstory_1
9-6-2012_pg5_2 ,
http://www.pakistantoday.com.pk/2011/08/30/news/profit/tea-smuggling-
discouraging-importers/ , http://www.brecorder.com/agriculture-a-
allied/183/1232625/

9. Pakistan Economic Survey 2011-12 and 2013-14, Ministry of Finance – Economic

Advisers Wing, available at: http://www.finance.gov.pk/survey/chapter_12/07-
Inflation.pdf

10. Statistics, Extracted from FAOSTAT, available at: faostat.fao.org

11. Statistical Data and Reports, Pakistan Bureau of Statistics, available at: pbs.gov.pk

12. Statistical Data and Reports, Pakistan Tea Association, available at:
http://www.pakistanteaassociation.com/statistics.html

13. Statistical Data and Reports, National Tea Research Institute

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14. Tariff Analysis Reports and Statistics, World Trade Organization, available at:
http://tariffanalysis.wto.org/report/TariffAverages.aspx

15. Taxation Rules and Principles, Federal Board of Revenue, available at:fbr.gov.pk

16. Tea Trade Issues for African, Caribbean and Pacific Countries, Agri Trade Analysis
and Expert Opinion, available at:
http://agritrade.cta.int/Agriculture/Commodities/Tea/Tea-Trade-issues-for-the-
ACP

17. The Role of National Tea Research Institute in Tea Production, Urooba Pervaiz,
Ayesha Khan, Noor Maula Khan, M. Zafarullah KHAN, Ikram-ul-Haq, Qasim Khan,
M. Idrees, Sohail Ahmad and Iftikhar Ahmad, Sarhad J. Agric. Vol. 25, No. 2, 2009,
available at:
http://www.aup.edu.pk/sj_pdf/THE%20ROLE%20OF%20NTIONAL%20TEA%20RE
SEARCH%20INSTITTUTE%20IN%20TEA%20PRODUCTION.pdf

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