Value Chain Analysis in the Food & Construction Sectors

1. Value Chain Analysis in the Food & Construction Sectors Micro & Small Enterprise Development Programme MSE Development Programme Value Chain Analysis

2. Value Chain Analysis in the Food & Construction Sectors • Rationale: • ECBP orients on Value-Chain Approach • MSE dominate many steps in the value chain • Objectives: • Identify & analyse prospective value chains • Draft strategies for value chain development • Identify possible contributions of MSE Project to value chain development MSE Development Programme Value Chain Analysis

3. Value Chain Analysis: Approach • Mission 1 (June 1 – July 6, 2005): • Value chain identification & analysis • Data & Document Review • Discussion with key actors • >50 company visits (Addis, Debre Zeit & Adama) • Mission 2 (September 2005): • Strategy development • Focus & Activities to be discussed ! MSE Development Programme Value Chain Analysis

4. Value Chain Analysis: Presentation Overview • Analysis of Selected Value Chains • Cereal Processing • Building Construction • Furniture & Metalworks • Key Issues • Policy & Business Environment • Company Reengineering • Standards & Certification • HRD / TVET • Outlook MSE Development Programme Value Chain Analysis

5. Cereal Processing Value Chain:Relevance • Dominating Processing Sector: • 53% of all Micro Enterprises • 87% of all Small Enterprises • 23% of all Medium & Large Enterprises • 53% of total manufacturing employment • Base for national food security • Population growth • Urbanisation -> Changing eating habits • Driver of rural growth • Regional export potential (medium-term) MSE Development Programme Value Chain Analysis

6. Spices, Oilseeds, Pulses Roasting Traditional Dry Food Retail Milling Service Supermar-kets, Food Retail Cookies Flour Mills Collec-tion Cleaning & Grading Pasta Cereal Farming Bakeries & Pastry Storage Animal Feed Beer Brewe-ries Bars & Restau-rants Threshing & Harvesting Services Seeds, Agro-Chemicals Malting Trad.Breweries (Tela) Packaging Materials Transport Services Equipment & Spare Parts Financial & Business Services Cereal Processing Value Chain:Structure Consumers MSE Development Programme Value Chain Analysis

7. Cereal Processing Value Chain:Demand Trends ... • Driving Forces: • Population growth -> overall demand increase • Urbanisation -> Changing eating habits • (Urban) income growth • Urbanisation: • More cereal products – less unmilled cereals & wheat flour • Caterers (Army, Universities) switch from Injera to Wheat bread • Urban medium & upper class trends: • Home-produced Injera • Wheat bread & pasta replace traditional bread • Factory beer replaces traditional beer • More food & drinks consumed outside from home MSE Development Programme Value Chain Analysis

8. Cereal Processing Value Chain:Demand implications • Bakeries: • 3-5% annual output growth (Addis 8-10%) • 600 Bakeries in Addis, room for new market entrants • ~ 320.000 t wheat flour demand p.a., growing • Breweries: • Strong growth (20-25% p.a.) • Major capacity expansion projects under way • Local malt supply insufficient – 40-50% of malt imported • Pasta & Cookies: • Market growth, new domestic entrants, but imports still dominate -> additional market assessment required • Flour Mills: • Stagnating household market, several new entrants • 30% overcapacity, heavy competition, low margins • Significant staff reductions, plant closures imminent ->Reorient on industrial customers; expand into baking/ pasta! MSE Development Programme Value Chain Analysis

9. Cereal Processing Value Chain:Urban Demand Trends (1) Trend to home-prepared Injera Teff milled Injera MSE Development Programme Value Chain Analysis

10. Cereal Processing Value Chain:Urban Demand Trends (2) Wheat bread & Pasta replace traditional bread Wheat Bread Traditional Bread Pasta MSE Development Programme Value Chain Analysis

11. Cereal Processing Value Chain:Urban Demand Trends (3) More outgoing, factory beer slowly replaces traditional beer Traditional Beer ´Drinks away from home Factory Beer MSE Development Programme Value Chain Analysis

12. Cereal Processing Value Chain:Farming Issues Production short of industrial demand: • Undersupply of hard cereals (for baking, Pasta) • Insufficient supply of cereals for malting (?) Input trade: • Develop & introduce high-productivity seed varieties (e.g. Triticale) • Provide effective yet harmless agro-chemicals Farmers: • Ensure compliance with processor‘s standards => Cooperation across the whole value chain (Input R&D -> Processors) required MSE Development Programme Value Chain Analysis

13. Cereal Processing Value Chain:Cereal Trade Structure Absence of generally accepted, certified standards & grades (Cereals, Flour): • Farmers: • Unable to incorporate margins for cleaning & grading (except large state farms) • Collectors / Wholesalers: • High costs for multiple sacking & inspection • Additional transport cost (10-12% impurities) • Insecurity inhibits inter-regional trade • Millers: • Additional cleaning costs (unreliable equipment) • Unable to guarantee flour quality • Bakers / Pasta makers: • Flour-related quality problems (additional costs) • General: • Lack of base for market information systems, warehouse receipts and cereal commodity exchange MSE Development Programme Value Chain Analysis

14. Metalworks & Furniture Mining (Limestone, Gravel stones, Marble) Metal Hardware(Production/ Import /Wholesale) Consultants Sand, Earth & Gravel General Contractors Cement Industry Concrete PipesHollow BlocksConcrete Tiles Sanitary Ware ElectricalsPaints&Lacquer Special Contractors Marble Production Retail Trade Packaging Materials Transport Services, Energy & Water Equipment & Spare Parts Financial & Business Services Building Construction Value Chain:Structure Private/ Public Construction MSE Development Programme Value Chain Analysis

15. Building Construction Value Chain:Market Overview Growing demand: • Population growth -> Public & private housing projects • Public construction: Universities, schools, hospitals etc. • Industrial & warehousing investment, office construction • New infrastructure: Dams, roads, bridges, water&electricity Supply issues: • Construction is slow, costly, and of varying quality: • Limited availability of skilled manpower & specialised contractors • Shortage of domestic inputs (cement, sand, gravel, marble etc.) • Most finishing materials are imported • World market price pressure (Steel, oil->bitumen, cement, transport) Wholesale trade weakly developed: • Limited product range, mostly lowest standard • Low market transparency • No „pulling“ of local suppliers MSE Development Programme Value Chain Analysis

16. Building Construction Value Chain:Sector Environment Public projects: • ~20% of projects obtained through corruption (Contractor‘s association estimate) • Partly run under youth employment creation objectives => Qualitynot always adequately supervised Standards: • Lack of standards & control for fittings & finishing (electricals, sanitary ware, windows, furniture etc.) : • Substantial entry risk for domestic investors • Discretionary decision power of consultants on non-standardised components -> risk of corruption & misappropriation • Public security risks & high maintenance costs thrugh inferior components Investment: • Equipment supplier credit not allowed by Nat. Bank • Difficult access to land for expansion / mining sites • No VAT refund on imported equipment for construction materials MSE Development Programme Value Chain Analysis

17. Households & Institutions Bamboo & Rattan Furni-ture Ma-king Furni-ture Retail WoodTrade Forestry Logging Sawmills Chip-board Iron Sheet Upholstry Iron Hardware Import Steel Mills PaintsFittings Contractors Profiles Tubes Reinforcement bars Metal Import&Trade Roofing Carpentry, Parquet Room Ceilings Steel Wire Nails, nuts & bolts Doors & Windows Steel Structure Buildings Raw Steel Import Galvanising Fencing Fences & Grills Transport Services, Energy & Water Equipment & Spare Parts Financial & Business Services, Designers Metalworks & Furniture Value Chain:Structure MSE Development Programme Value Chain Analysis

18. Metalworks & Furniture Value Chain:Market Overview • Increasing demand: • Population increase and urbanisation • Public investment in schools, universities and hospitals • Increasing private investment (office furniture, restaurant furniture, etc.) • Low-cost housing requires different furniture design Supply issues: • Decreasing availability of local wood • Local chip wood manufacturing has reached capacity limit • Worldwide increase of steel price ->Working capital shortage of metal processing • Paints and lacquer well developed • All fittings imported MSE Development Programme Value Chain Analysis

19. Metalworks & Furniture Value Chain: Challenges & Way Ahead Challenges: • Strong import competition for office and household furniture • Imported metal hardware competes on lower quality and price Way ahead: • Replace wood by laminated chip wood, metal and bamboo • Introduce & monitor minimum standards for metal hardware • Enhance market research and design capabilities • Strengthen efficiency of local metal processors MSE Development Programme Value Chain Analysis

20. Policy & Business Environment:Key Issues • Review VAT System • Integrate MSE into VAT system (not TOT) • Expedite VAT refunding • Simplify VAT invoices • Check for inconsistencies (e.g. flour VATable, whereas bread VAT-exempt) • Liberalize foreign trade • Remove obligatory shipping with Ethiopian Shipping Lines • Allow for international supplier credit • Allow for customs refund on imported products • Enhance investment and access to finance • Re-vitalise privatisation efforts to supply additional investment capital • Create infrastructure for share exchange market • Review exclusion of foreign banks from Ethiopian market • Conduct investment fairs to bring together business ideas and capital MSE Development Programme Value Chain Analysis

21. Business Re-engineering: Support Needs • Marketing Strategies: • Adapt to changing demand (e.g. Milling, dry food, injera, bakeries, furniture) • Increasing production efficiency: • Workflow management, maintenance, quality management (e.g. metal industry & processing, construction inputs) • New technology: • Using Triticale wheat in cereal processing • Laminated chip board in furniture making • Operating automated (computerised) machinery • Waste management and treatment • Financial Management and Planning: • Investment planning • Working capital management (increased input prices of cereals, steel, wood, gravel, cement etc.) • Others, e.g. • Change management and creativity • Team building and multitasking, • IT-based business management solutions MSE Development Programme Value Chain Analysis

22. Business Re-engineering: Proposed Approach International Consultancy Facility Large Enter-prises Twinning Commercial BDS Provision Medium Enterprises Linkage MSEs BDS Facilitation MSE Development Programme Value Chain Analysis

23. Standards & Certification:Key Issues Lacking (enforcement of) standards: • Cereal grades & quality, flour, bread • Construction finishing components (electrical, fittings, sanitary wares, etc.) • Furniture (minimum weight/load bearing, etc.) Two functions of standards & certification: • Consumer protection (e.g. bread, furniture)=> Cooperation with consumer associations in standard setting & supervision ? • Enhance market transparency & efficiency; lower investment risk,=> Integrate industries in standard development, promote industry standards, orient on international standards MSE Development Programme Value Chain Analysis

24. HRD & TVET:Key Observations • TVET/HRD needs named by discussion partners: • Project managers, claims & contract handling (contractor) • Furniture designers • Food quality control / laboratory staff • Equipment maintenance • Automated equipment operators • Millers, bakers, brewers • Wood processing • Metal casting -> fittings, spare parts • Heat treatment, galvanising, electroplating • Innovation: • No R&D/Training/Information Centre for cereal processing and for furniture making • Sector associations weak – how can they be strengthened? • Chambers and EMIA as alternative platforms for innovation generation & exchange? Training by Suppliers: • Petram: Baking with imported yeast • Kadisco: Wall painting training, adhesive application in shoe making • Kaleb (Claas): Maintenance of agricultural machinery => How can such practices be supported??? MSE Development Programme Value Chain Analysis

25. Consultants Information seminar (0.5 days) Contractor’s Head Office / Engineers Supervisors Short Training (2-3 days) Craftsmen Extensive Training /TVET (2 weeks ++) HRD & TVET:Integrate TVET & Innovation Dissemination • TVET alone may not result in effective change • Decision makers need to be informed about new techniques as well ! Building Construction Example MSE Development Programme Value Chain Analysis

26. Value Chain Analysis: Outlook • Mission 2 (September 2005): • Completing research • Review MSE Pro experience • Additional value chain research (e.g. bamboo, logging & sawing, linseed & linnen) ? • Field research in other regions ? • Analysis of potential implementation partners (e.g. sector associations) ? • Assess activities of other donors & related ministries ? • Strategy development • Drafting implementation mechanisms & structures • Defining performance indicators ? • Validation workshop with main stakeholders • Report preparation MSE Development Programme Value Chain Analysis