An Overview of the Integrated Value Chain Analysis™ Of Selected Strategic Sectors The Government of Ethiopia and The Wor

1. An Overview of the Integrated Value Chain Analysis™ Of Selected Strategic Sectors The Government of Ethiopia and The World Bank Group Addis Ababa, Ethiopia 23 May 2006 Presented by Global Development Solutions, LLC™ www.GDS-LLC.com

2. Sectors Presented • Cut Flowers (Roses) • Cotton-to-Garments (Polo Shirt) • Skins-to-Leather Shoe • Housing/Road Construction

3. Value Chain Analysis for Cut Flowers (Roses)

4. Cut Flowers Roses Market Opportunities and Characteristics Ethiopian Exports (Roses): $10 million (2005) Global Demand (Cut flowers/buds) $12.3 billion (2005) • Fierce Competition with downward price trends • Stricter breeders’ rights as well as environmental and social codes of conduct increasingly important • In some countries, such as the UK, increased importance of supermarket (direct sales) distribution channels

5. Cut Flowers Roses Farm-to-Market Value Chain for Soil-Grown Roses Farming 24.8% Post-Harvest Handling 1.7% Transport & Marketing 73.5% Farm-to-Market Value Chain for Hydroponics-Grown Roses Farming 24.1% Post-Harvest Handling 1.5% Transport & Marketing 74.4% Key Findings from the Value Chain Analysis • Farming with self propagated material or in hydroponics media both provides superior cost competitiveness via reduced plant material cost and higher yields US$255,683/ha US$0.155/stem 1.65 mil stems/ha US$294,190/ha US$0.150/stem 2.1 mil stems/ha • Insufficient coverage of cargo flights exacerbates the already high portion of transportation and marketing cost in the total farm to market value chain

6. Cut Flowers Roses

7. Cut Flowers Roses Cut Flower Supply Chain for Ethiopia Local Inputs Flower Producer Imported Inputs Imported Input Traders On-site inspection and customs (MoA, Customs Inspectors) Refrigerated Truck Airport Airlines (EA, KLM, Lufthansa) Freight Forwarding Services Cold Storage Passenger Cargo Cargo Source: Global Development Solutions, LLCTM Export Market Dutch Auctions Export Market Other 2/3 1/3

8. Cut Flowers Roses Hydroponics vs. Soil Production

9. Cut Flowers Roses Benchmarking Key Characteristics of Rose Production in Ethiopia

10. Cut Flowers Roses Key Constraints and Challenges • Poor clearinghouse services • Undeveloped network of supporting service providers, especially in the area of insurance and freight forwarding/clearing • Nonexistent research and development, at business and public sector level • Increased diversification away from direct sales towards Dutch Auctions

11. Cut Flowers Roses Actions/Way Forward Firm Level • Increase usage of hydroponics growing medium • Increase self-propagation of plant material • Increase usage of support services rather than do all marketing by themselves • Do not entirely diversify away from direct sales Industry Level • Establish Codes of Conduct • Create captive cost-minimizing supply chain structures for fertilizer and other inputs • Create industry level linkages with the support industries such as insurance and freight forwarding • Create partnerships with the public sector to intensify research and development

12. Cut Flowers Roses Actions/Way Forward Public Sector • Establish a working system of breeders’ right protection with eventual membership in the UPOV - gain observer’s status in UPOV as an intermediary step; • Establish clearing house facilities at airport and increase cargo freight fleet by Ethiopian Airlines; and • Increase spending in research and development.

13. Value Chain Analysis for Cotton-to-Garments

14. Cotton to Garments Polo Shirt Market Opportunities and Characteristics Ethiopian Exports (Textiles/Garments): $3.6 million (2005) Global Demand: $183 billion (2005) China: 60% of US Market AGOA: 1.3 billion sme (only 11.7% quota filled) • Multiple fashion trends in one season, mass customization and shortened lead times • Increased leverage and market power of large retailers who can and do downward price pressures on suppliers • Quota removal has removed competitiveness from suppliers relying on quota preferences for market access • AGOA window of opportunity narrowing: proliferation of AGOA-type preferential treatment on the part of the USA extended to many countries. • Chinese temporarily withdrawal from knit shirt and cotton trouser market, key segment of African apparel exporters

15. Cotton to Garments Polo Shirt

16. Cotton to Garments Polo Shirt Diagram XXX: Value Chain for Exported Polo Shirt, Private Firm, Ethiopia

17. Cotton to Garments Polo Shirt Key Findings from the Value Chain Analysis :An Example of Polo Shirt Production • Lack of transparent cost accounting (SOE) • Poor labor skills • Excise duty on fabrics hamper competitiveness • High cotton fabric waste (SOE)

18. Cotton to Garments Polo Shirt Poor Labor Productivity

19. Cotton to Garments Polo Shirt

20. Cotton to Garments Room for Improving Lint-to-Yarn Conversion Ratio Polo Shirt

21. High Cost of Ginning Cotton to Garments Polo Shirt

22. Irrigation – Key to Competitive Cotton Production Cotton to Garments Polo Shirt

23. Cotton to Garments Polo Shirt Need for Improving Farming Practice

24. Cotton to Garments Polo Shirt Key Constraints and Challenges • Poor training know-how and non-existent institutional support in the area of skills improvement; • Counterproductive Government taxation in the form of VAT and excise duty; • Inefficient and wasteful public textile companies unable to supply sufficient quality and quantity of fabric for garment exporters; • Cotton lint production dominated by large scale companies with no access to irrigation (private companies) and thus have low cotton yields; and • Large scale farms with access to irrigation (mostly SOEs) are challenged by an overburdened administrative overhead cost structure.

25. Cotton to Garments Polo Shirt Actions/Way Forward – Garments and Textiles Firm Level • Improve productivity training; and • Reduce waste on the part of SOEs both at fabric and textile level. Industry Level • Create research and training centers; and • Pool resources for marketing efforts abroad. Public Sector • Privatize textile assets; • Remove or reduce excise duty on textiles; and • Expedite VAT refunds.

26. Cotton to Garments Polo Shirt Actions/Way Forward – Cotton Firm Level • Improve farm management and remove OH redundancies at both farms and ginneries; • Invest in seed production; and • Maintain high GOT levels. Industry Level • Develop market linkage mechanisms to help link the most productive farms (usually irrigated farms) with the most efficient ginners Public Sector • Extend the irrigation network; • Establish and enforce rules for chemical usage at farm level; • Increase spending on cotton research; and • Stimulate seed sector.

27. Value Chain Analysis for Skins-to-Leather Shoes

28. Shoes Leather Market Opportunities and Characteristics Fresh Sheepskin Production Africa (Total): 154,285 MT (8.6% of World Production) Ethiopia: 10,0800 MT Ethiopia’s Export of Dried Salted Skins: 2,888 MT (73.2% of African exports) (6.6% of Global exports)

29. Raw Sheepskin Supply Chain in Ethiopia: High Waste and Damage Shoes Leather

30. Poor Quality of Skins Shoes Leather Declining Share of Grade 1-3 and 4 Skins

31. High Cost of Wet Blue Production Shoes Leather

32. Shoes Leather High Opportunity Cost of Ekek

33. Shoes Leather Market Opportunities and Characteristicsfor Leather Shoes EU Demand for Shoes: €61.8 billion Sourcing from Developing Countries: 24% - 53% Italy (Largest EU Consumer): 395.3 million pairs/year Ethiopian Production Formal Sector: 1.9 million pairs/year Informal Sector: 3.5 million pairs/year • Low capacity to respond to international orders both in quantity and time; • Poor finishing due to lack of skilled labor and appropriate technology; • Slow responsiveness to change shoe models; • High production costs; and • Lack of marketing skills.

34. Shoes Leather Key Findings from the Value Chain Analysis • High cost of raw material (Birr 79.77/pair) • High wastage of material during cutting (15%) • High cost of material for lasting and finishing (27.6% of shoe manufacturing)

35. Shoes Leather High Assembly Costs Poor Labor Productivity

36. Shoes Leather Key Constraints and Challenges Raw sheepskin • Ekek attack(almost 80%of sheepskin from highland Ethiopia) ; • Unorganized supply chain in raw sheepskin; • Per piece pricing does not reward quality; • Poor slaughtering and post slaughter handling; and • Low awareness for quality of sheepskin along the entire supply chain. Leather • Overall shortage of sheepskin and under capacity operation (48%) and • High cost of input raw sheepskin (60% of production cost); • Defect of raw sheepskin (80% Ekek, 10%lack of preservation, and 10% lack of proper handling): and • Shortage of skilled workers. Shoes • High cost of raw material (upper shoe leather 90% of cost); • Lack of skilled labor and inflexible technology to respond to market; • Dumping of low price and low quality shoes from China; and • Low capacity utilization of shoe producers (56%).

37. Shoes Leather Actions/Way Forward Firm Level • Install and strengthen the finishing lines in the tanneries; • Conduct training of workers; and • Improve environmental performance. Industry Level • Establish a quality-based pricing system for sheepskin; • Assist improvement and expansion of slaughter houses and raw sheepskin storage; • Form Public-Private Partnerships to eradicate Ekek; • Arrange supply of semi-finished skin to tanneries that process finished leather so that shortage is avoided and prices normalized.

38. Actions/Way Forward (Cont’) Public Sector • Take immediate action on ekekcontrol and eradication; • Strengthen and expand extension services on skin and hide; • Give incentive to tanneries that process sheepskin to finished leather; • Strengthen LLPT1 as a center of excellence that provides training and conduct R&D to support tanneries; • Encourage export of meat and suppress export of live animals; • Encourage investment in animal husbandry farms; • Expand modern slaughterhouses; and • Expand veterinary services.

39. Value Chain Analysis for Housing and Construction

40. Housing & Road Construction Housing: Profile Building Height: Ground + 6 floors Total Building Area: Multi-family apartment (24 units) 175.23 m² Site Work: 850 m² of asphalt pavement Engineering Estimates

41. Housing & Road Construction Housing Construction Value Chain Construction Phase

42. Housing & Road Construction

43. Housing & Road Construction High Cost of Input Material

44. Housing & Road Construction

45. Housing & Road Construction Low Road Density

46. Housing & Road Construction Key Findings from the Value Chain Analysis (Road) • The bulk of the value added comes from construction of the road (90% of the total cost of road construction); • The highest cost of construction for base-course (constitutes 48% of road construction work ); • Quarry rock production activity is the highest (33% of base course cost) during the base-course phase due to high cost of equipment (constitutes 49.37%)

47. High Equipment Input Requirement Housing & Road Construction

48. Housing & Road Construction High Cost of Equipment Rental and Finance

49. Housing & Road Construction Key Constraints and Challenges Housing • Unavailability of adequate standards and norms; • Limited design checking/review and approval procedures; • Lack of IT know-how and training; • Lack of Standard Contract Documents; • Shortage of construction material; • Shortage of construction machinery; • Scarcity of finance and lack of management skill; and • Lack of Building Code. Road • Shortage of equipment rental company and high rental cost; • Limited access to Finance; • Shortage of qualified national engineers and technicians; • Lengthy dispute settlement mechanism and lengthy judiciary process; • Bureaucratic and lengthy bid analysis practices; and • Absence of proper mechanism for addressing material cost escalation.

50. Housing & Road Construction Actions/Way Forward Firm Level • Facilitate and provide proper training and capacity building programs to overcome the shortage of skilled human resource to deliver efficient services; and • Applying the use of contemporary IT software and equipment. Industry Level • Introduce a mechanism whereby design fees reflect industry wide quality standards; and • Implement industry-wide Code of Conduct and certification program to ensure a quality rather than price driven project bidding process.