gtz Fachtage, 22. August 2007, Bonn German M üller, Valerie Schuster, Michael Nebelung

1. gtz Fachtage, 22. August 2007, Bonn German Müller, Valerie Schuster, Michael Nebelung Improving the Business Climate Using the Value Chain Approach – Examples from the Ethiopian Pharmaceutical Sector

2. Business Climate and Value Chains Agenda • General Approach • Example Ethiopia • Ethiopian Pharmaceutical Sector

3. Business Climate and Value Chains Ethiopia – Development in a non-market economy Ethiopia’s mental model is still influenced by ideas of a planned economy (“Developmental State”) • Lack of market understanding /knowledge • Lack of demand orientation • Lack of market information • Insufficient communication between different market actors • Spot-market relationships predominant • Lack of structures and institutions such as functioning capital market, associations • Inward looking focus: lack of trade relationships with neighboring countries and little exposure to international good practices Non-market economy

4. Business Climate and Value Chains ecbp – Four components for increased competitiveness and employment Quality Infrastructure University Reform ecbp Private Sector and Business Development TVET System

5. Business Climate and Value Chains Bottom-up Sector Development and Top-Down Barrier Removal via BC Indices Barrier removal – BC Indices Sector development Combination of both Advantage : • Tailored measures to service specific needs of one industry and/or specific actors • Quick wins Disadvantage: • Possible errors in assessing growth potential of chosen sector • Sustainability uncertain if supportive measures stop • Distortions in the market regarding other sectors Advantage : • Creation of environment for entrepreneurship • No distortions of market: Most competitive sectors/companies will grow Disadvantage : • Sector specific bottlenecks not recognized • BC Indices not always up do date • Informal barriers to implementation of policy reforms not recognized • Actors to carry out policy changes not indicated versus Combination of both top-down barrier removal via Business Climate Indices and sector-based bottom-up initiatives proves to be fruitful

6. Business Climate and Value Chains Support of overall BC measures though Value Chain Approach PPD Fora Information Exchange RemovingInformal Barriers Empowerment Private Sector Description • Sector specific • Identification of specific BC bottlenecks • Verification of opinion of one group of actors against the opinion of others • Constant dialogue between policy makers and companies • Removing of informal barriers (e.g. lack of capacity of relevant actors) through (sector) development measures • Macro level: (Nation) branding • Meso level: CD for intermediate actors • Micro Level: technical/managerial upgrading of companies (companies as partners for export/ FDI) • Goal: Private Sector to take over new role as advisor, lobbyist, implementer

7. Business Climate and Value Chains Ethiopia – quo vadis? Very ambitious targets for Ethiopia by current Government South Korea Ethiopia Tanzania

8. Business Climate and Value Chains Ethiopia’s poor ranking in WEF Index due to Infra-structure, Health and Education… Higher Education and Training Health and Education Country Institutions Infrastructure Macroeconomy Singapore Finland Germany South Africa Kenya China Ethiopia India Brazil Tanzania Source: WEF, 2006

9. Business Climate and Value Chains … as well as a poor performance in productivity drivers such as market efficiency, technological readiness and innovation (Ranks of selected country examples) Technological Readiness Business sophistication Country Market Efficiency Innovation Singapore Finland Germany South Africa Kenya China Ethiopia India Brazil Tanzania Source: WEF

10. Starting a business Dealing with licences Hiring / Firing workers Registering property Getting credit Protecting investors Paying taxes Enforcing contracts Closing a business Business Climate and Value Chains Relatively good overall business climate but poor ease of trading across borders Ethiopia’s ranking Overall ranking out of 175 countries Country Singapore Thailand Germany South Africa Kenya China Ethiopia Brazil Trading across borders India Tanzania Source: Doing Business 2006, World Bank

11. Business Climate and Value Chains Verification of World Bank results for the pharmaceutical, textile, leather sector through PPD Benchmarking Stakeholders Interviews, Analysis, Workshops • Policies far better than suggested* • Problem rather lies in capacity of actors/ infrastructure • Trading across borders: • Export: 8 docs, 600 US$ per 20 ft container, 22 days • Import: 11 docs, 2,000 US$ per 20 ft container, 40 days • Suggestion: capacity of actors, infrastructure Doing Business Report • Overall ranking of Ethiopia fairly good: 97 out of 175 countries ranked • Worst performance in trading across borders: 147 out of 175 countries • Export: 8 docs, 1,000 US$ per 20 ft container, 45 days • Import: 11 docs, 2,455 US$ per 20 ft container, 52 days • Suggestion: change policies and regulations vs. *also verified by USAID eCLIR for WTO accession

12. Business Climate and Value Chains Top-Down Approach Activities derived from Stakeholder Analysis – important, but not enough to make sector competitive Training & Communication Shippers‘ Council Transport One Stop Shop • Develop comprehensive training schemes for • Customs • Banks • Companies • Transportation companies • Trust-building and improvement of mutual understanding • Creation of PPP – Project to unite exporters and importers and point of contact • Vis-à-vis Government regarding export promoting policy changes • Vis-à-vis shipping liners regarding reliability and prices • Generation of information relevant for traders • Establishment of National Trans-port Association: • Increase fleet efficiency and utilization • Lower costs • In-depth analysis of FDI potential in truck fleet and railroad regarding legal regulations and economic viability • Support forongoing activi-ties of other actors • Establishment • Financing

13. Business Climate and Value Chains Completion via Value Chain Analysis of Ethiopian Pharmaceutical Sector Functions Service Inputs Producedrawmaterial Import Manu-facturing Wholesale Distribution Naturally sourcedraw mat. PSLD VC Actors Public Health Pharmid Private Retailers Agents Local Manufacturers Foreign Manufacturers Private Wholesalers Others Others VC Supporting Actors ecbp Pharma Association Banks MoR Donors Manufacturers‘ Association Customs MoTI School of Pharmacy Customers‘ Association MoH - DACA WTO/WHO

14. Business Climate and Value Chains Growth targets in pharma sector vs. Challenges identified in Value Chain Stakeholder Workshop/Expert Analysis Assuming Government targets for domestic production and exports in mio US $ Challenges • To reach targets, FDI is needed, but Ethiopia is not known as potential investment/ production partner • TRIPS – need for adjustment of regulations to fully use flexibility of patent rights • Duty Issues on imported raw materials • Discrimination of local companies in tenders (KIT system) • Access to finance (supplier credit) • Lack of Capacity of national Drug Administration and Control Authority • Lack of GMP certification of companies • Lack of technical and managerial (especially regarding marketing) capacity in companies Domestic consumption CAGR 41% Exports 191 38 34 153 0 2005 Total production 2010 Government target for exports/production Source: MOTI; team analysis

15. Business Climate and Value Chains Results achieved Combined Top-Down and Bottom-up approach Activities Re-check InternationalBC indices/ Activities Proved WB indicators to be inaccurate/ current situation in Ethiopia better Advocacy Tax/Duties/ Access to Finance Import Duties for raw materials reduced to zero Macro Level Advocacy Tenders Package Tenders opened, 150% more tenders won by local companies Advocacy Patent Law Quality of Inspections improved, false foreign drugs banned, feasibility bioequivalence lab Actions Technical Support DACA Meso Level PhD program in cooperation with local companies started Technical Support School of Pharmacy Regular PPD, Elaboration of Development Master Plan, good cooperation with UNCTAD/Regional Initiatives PPD/Donor Coordination Support taking advocacy role Private sector actively engaging in PPD, taking over new advocacy role Envisaged that 3-4 companies reach GMP qualification mid next year Support GMP Qualification Micro Level First meetings held, regular exchange Market LinkagesBuyer/Seller/Supplier International Matchmaking Negotiations with German investors on the way Source: Team analysis

16. Business Climate and Value Chains Conclusions Combination of barrier removal and sector development Potential for further development Advantages: • Tailored measures to service specific needs of one industry and/or specific actors • International Benchmarking with other countries possible • Systemic and Institutional Change combined with the necessary capacity development for relevant actors (“on the job”) • Large and sustainable impact as well as quick wins (helps to keep the motivation of the actors up) • Larger amount of resources to really boost industrial development in selected sectors • Identification of potentials for transfer to other countries/regions

17. Business Climate and Value Chains Thank you for your attention

18. Business Climate and Value Chains Backup

19. Business Climate and Value Chains Export procedure* (1/2) Receiving Letter of credit Bank permit Export declaration Transport to Djibouti Description • Mode of payment by beneficiary: L/C; Telegraphic Transfer, CAD or Consignment • Preparation by clearing agent*** • Verification and inspection of goods**** by customs • Truck • Rail not available • Permission to bring foreign currency to Ethiopia Agencies involved • Private bank delegated by National Bank** • Clearing agent • Customs authority (ECuA) • Truck company • Private bank delegated by National Bank Time • 30 min • 1-5 days • 2 days from Addis Costs • 0.45 – 0.5 % of value of good • ~ 3000 Birr / 20 ft container • ~ 4000 Birr / 20 ft container * Assuming necessary export permit from MOTI has been obtained; **Only coffee and gold exports handled directly by the National Bank; *** Invoice, certificate of origin, bank permit, freight invoice / cargo booking;**** Depending on product additional authorization by Ministry of Finance and Economic Development, Ministry of Trade and industry, Ministry of Health, Quality and Standards Authority of Ethiopia, Ethiopian Intellectual Property Office, Ministry of Agriculture, etc. required Source: Interviews

20. Business Climate and Value Chains Export procedure (2/2) Clearance In Djibouti Shipment Bill of lading Payment of Exporter Description • Unloading truck • Verification of export declaration and container** by Djibouti customs • Loading of vessel • Bill of lading collected by clearing agent • Docs required by L/C • Payment in Birr* • Notification of National Bank Agencies involved • Clearing agent • Djibouti customs • Clearing agent • Shipping company • B/L forwarded to beneficiary by handling bank • Private Bank • National Bank Time • 2 -3 days • 1-2 days • 1-10 days Costs • Included in clearing agent fee • 200 Birr • 1000 Birr service charge for money transfer * Option of retention account: 10% can be kept in foreign currency; 90% can be kept in foreign currency for 28 days in foreign currency account. ** Due to container shortage some merchandize will be containerized and weight in Djibouti Source: Interviews

21. Business Climate and Value Chains Import procedure (1/2)* Pro forma invoice Insurance for Goods** Permit for foreign currency Letter of cre- dit / bank docs Description • Pro forma invoice from supplier to importer • Insure goods listed in pro forma invoice • Import license • Pro forma invoice • Insurance • Tax identification No • Opening of L/C** obtainable from any bank Agencies involved • Private bank delegated by National Bank • Private bank delegated by National Bank • None • Insurance company Time • 1 day • 1-3 days • 1-15 days Costs • 0.4-0.5 % of value of good • 1% of value of goods • 2,5-3% of value of good bank service charge * Assuming necessary import license from MOTI has been obtained and Importer pays via L/C and not cash against documents; ** Other modes of payment: Cash against documents or advance payment (if sum for advanced payment exceeds US $ 5000 bank guarantee by foreign bank required) Source: Interviews

22. Business Climate and Value Chains Import procedure (2/2) Customs declaration Clearing Djibouti Transportation to Addis Clearing ECuA Description • Preparation of necessary docs by clearing agent* • Payment of duties • Customs in Djibouti verify sent docs and goods • Unloading and loading of truck • Payment of port dues & storage • Transport via truck • Verification of goods and docs • Clearing agent • ECuA • Clearing agent • Customs Djibouti • Port authorities • Clearing agent /freight forwarder • Truck company • ECuA Agencies involved Time • 1-7 days • 3-15 days • 2 -7 days • 1-3 days; occasio-nally up to 2 months Costs • ~ 3.000 Birr for 20 ft container • 10.000 Birr for 20 ft container *Bill of Lading, packing list, invoice, certificate of origin, bank permit, insurance, freight invoice and - depending on product – required additional authorization by Ministry of Finance and Economic Development, Ministry of Trade and industry, Ministry of Health, Quality and Standards Authority of Ethiopia, Ethiopian Intellectual Property Office, Ministry of Agriculture, etc. Source: Interviews

23. secondary issues identified by stakeholder workshop Business Climate and Value Chains core issues identified by stakeholder workshop Core issues regarding input drivers in pharmaceuticals Technical Skills Managerial Labour force Input drivers Labour Productivity Cross value chain Networking Marketing Information Capital stock Revenue Access to capital Deprecia-tion Capital employed Quantity Supply of materials Capital Invest-ments Quality FDI Productivity Technology Domestic savings Domestic investment Land Quality managmt Capital outflow Productivity Duration Land in use Amount Productivity drivers Legal framework Interaction with Government Infrastructure Macroeconomic stability Capital market liquidity Entrepre-neurship Source: Team analysis

24. secondary issues identified by stakeholder workshop Business Climate and Value Chains core issues identified by stakeholder workshop Core issues regarding productivity drivers in Pharmaceuticals Public Tenders Tax Legal Framework Macro-economic Stability Duties Patent Law Business Climate Red Tape Interaction with Government Entrepreneur-ship Corruption Road/Port Infrastructure Capital Market Liquidity Quality Electricity Telecom / Internet Source: Team analysis