Transcript Julius Gatune Kariuki_SET Nairobi Workshop April 2015

Kenya as a services hub
The role of services in economic transformation
Dr Julius Gatune
African Center for Economic Transformation (ACET)
SET workshop
Intercontinental Hotel, Nairobi
28th April 2015
Agriculture plays and Key Role in Kenya Economy, however full potential
yet to be tapped
Agriculture generates about 52% of GDP (25% directly and 27% through manufacturing,
services and distribution). However the full potential is yet to be un-locked as structured
48% of Value
Production
52% of Value
Logistics
Processing
Marketing and
distribution
..True potential will come from transformed agricultural value chains
90% of Value
10% of Value
Production
Logistics
Processing
• Agricultural growth has not translated to poverty much reduction
• Too many people working in low productivity farm jobs yet a
transformed value means more jobs upstream
• Marketing not production should be the locomotive that drives
the chain
Marketing and
distribution
Services are key to
transformation of the
agricultural value
chains
2
Kenya Agricultural value chains have many challenges
Production
structure
Issues
Policy
Questions
•Low yields
–Saved seeds
–Inputs (fake, costly)
–Low knowhow
•Poor quality
–Equipment lack
–Cheating
–Mixing varieties
•Labor challenges
•Subsistence
orientation
•Who to support
(small holder ?)
•What to subsidize?
(inputs or Info?)
•Farmer
organization
•
•
Logistics
Processing
Marketing and
distribution
•Post-harvest losses
•No Supply guarantee-
•Informal markets
(upto 50% reported)
–Storage e.g. evening
milk, pests
–Transport
•Middlemen/women
stranglehold
(bogeyman?)
•Payment on quantity
rather than quality
quantity , quality and
price
•High costs (energy,
packaging)
•Access to equipment
•Product development
dominance thus low
value addition
•Low products diversity
•Low quality products
•Inability to address
changing markets
–urban poor
–Urban rich
Be
•Formal vs informal
•Artisanal vs formal
(milk trader question) •Trade policy e.g
•Food imports bans vs
tariffs?
•Market infrastructure Sorghum bread)
•Mandates vs incentives
(govt vs private vs
•Industrial policy•PPPs for market and
PPP)
equipment fabrication, distribution
vs imports
DEGRP and BMGF has given grants to ACET to study how to
improve agric. supply chains
ACET study sought to better understand the challenges of
Kenya agric. value chain and potential interventions
Policy should prioritize
how to deliver better
services and catalyze
innovations rather than
focus on providing inputs
Innovations in services is starting to play a key role in farm
level production
Knowledge
• Franchising model for inputs supply e.g.
farmshop
• Inputs as a service model e.g. weed killers
• Smart card to better target subsidies
.
Inputs
• ICTs addressing information asymmetry
and knowledge gaps; iCow, Esoko, M-Farm
• Successful Farmers as consultants – a new
line of business for medium sized farms
• Knowledge platforms e.g. KAAA
Farm
mechanization
Financing
models
• Tractors for hire model being promoted by
counties
• Rural fabricators can sell a service rather
than selling equipment (key to success of
Gari enterprises in Nigeria)
• Finance as part of an inputs package e.g.
One acre fund
• Identifying key places to offer finance e.g.
root capital model
• Insurance -Credit risk e.g. USAID, rainfall
insurance
• Service oriented
business models can
play a key role in
improving productivity
₋ Poor farmers cannot
acquire capital
equipment but can
pay for a service
₋ Good entry point for
youth in agriculture
as service providers
Can we subsidize
service as we do for
inputs and what
business model will
have the desired
impact
FBOs should be the ideal vehicle for providing needed services to upgrade
chains, however we are yet to come up with governance models that work
23.3
Advantages
of Millet
cooperative
5.6
2.2
Risk
reduction
13.3
14.4
Ready
market
Capacity
building
7.8
6.7
Lump sum
Better
Cheaper
payment prices and farm inputs
price
stabilization
O
Challenges
of Millet
cooperative
6.3
Exorbitant charges
Source: field survey 2014
14.1
26.7
Source of Access to
finance/ information
credit
and
extansion
60.9
services
18.8
Hard to change
Delay in payments Mismanagement,
prices/ loss of
disputes and
individual bargaining
corruption issues
power
Mashinani is an
interesting model of
FBO who different
members offer different
services
Traders/middlemen provide perhaps the most dynamic entry point for
service based interventions
Input services
Knowledge
transfer
PHL prevention
services
Financing
• Trader can use same infrastructure to buy and supply
input e.g. Pwani feeds
• More likely to be trusted by farmers as perceived to
have better knowledge of market of what to grow
and when. In Benin the success of Nerica was due to
efforts of one trader
 Can be instrumental in improving quality e.g.
Potential for creating
a moving traders to
become logistics and
knowledge providers
offering drying services or support
 Warehousing services, commodity exchanges
• Intimate knowledge from repeated interaction
mans middlemen have better understanding of
credit worthiness of various farmers. In Ghana
some middlemen (market women) pre-finance
farmers.
How to catalyze the
consolidation of the
trading sector without
creating monopolies
6
Services can help build trust needed to make contracting model work
Processor
Farmer
Buy crop
Crop
Food products
When farmers engage with
processors as buyers and sellers, a
deeper relationship is established.
More importantly this intimate
relationship provides
opportunitiess to provide
extension services and inputs to
improve quality and also increase
demand
Livestock
Sell animal feeds
• Poor farmers are risk averse and thus not likely to invest in expensive
inputs.
• Diversifying incomes is one way of reducing risk. When processors help
farmers diversify risk, they increase their supply e.g. Numa feeds with
millet farmers in Uganda
Animal feeds
Diversifying incomes
is key to lowering
farmers risk aversion
and thus technology
uptake
7
Rural processors and urban based SMEs processors can complement each
other through a service model
SME processor
Artisanal processor
Strengths
• Sourcing raw
materials (many time
they are owned by
farmer groups
Challenges
• Meeting food and
product standards due
low level of knowledge
• Product development
and packaging
• Knowledge of urban and
export markets
Supply bulk product
Artisanal processor can
become a contract
manufacturer for SME
processors. SMEs does
product development
packaging and marketing
e.g. Model used by St Bassa
Processors in Ghana
Consultancy services
Strengths
• Identifying markets
and developing
products development
• Navigating regulatory
space
Challenges
• Steady supply of raw
material
Can supermarkets be
incentivized to develop
support emerging cottage
industry to become
contract manufacturers
8
Markets should drive value chain
What does
the market
want?
Where is
the
market?
• How are diets are diets shaped?
• New emerging urban markets:
– Urban poor want convenience
and cheap food
– Urban middle class want
convenient and healthy food
• Kenya has an extensive regional
supermarket network creating a
natural regional markets
• Urban markets now dominate
50% of all agricultural products
but how to tap the market
• Image building should be a
big part of value chain
development (Senegal
farmers increased production
by 30% after advertising
campaign of local price
• R&D is the other side of the
coin. Cassava resilience in
West Africa demonstrates the
power of innovation
Can traditional cereals
with their poor image
capture urban markets?
Yes ! It is about product
development and
marketing
9
Millet is preferred to other grains due to perceived higher nutrition ,
however awareness and availability of millet products is very low.
Grains preference (% expressing)
Reason for Millet preference (% expressing)
44.3
59.8
40.2
19.8
24.4
11.5
Other starchy grains
Millet
Affordability
taste
Availability
Nutrition
Millet products awareness (%) Millet foods eaten (%)
Flour
97%
Bread
Biscuits
Porridge
62%
26%
10%
Millet cookies
8%
Beer
6%
Millet rice
3%
Pop millet
1%
Ugali
52%
cookies
1%
Maandazi
1%
• Flour is the millet product
mostly known and is mainly used
for porridge and ugali
• Narrow product range limits the
market for millet
• Millet is preferred to other grains
and more importantly preference
due to nutrition underscoring the
potential for development of high
value products
What can cassava resilience in West Africa teach us?
Food Supply, Cassava Maize, Rice, Wheat West Africa
Food Supply (kcal/capita/day)
800
700
600
500
Maize
400
Rice
Wheat
300
Cassava
200
100
0
1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009
Product
innovation
Technology
innovation
• Gari has emerged as the defacto meal for the urban poor
• Odorless fufu has penetrated middle class and diaspora
markets
• Attieke is competing with rice of texture and convenience
• HQFC now substituting wheat
• Strong local fabrication capacity has delivered appropriate
technologies for processing
• Innovative business models have technologies available to
poor farmers
How do we support
emergence of an
innovative system that
links research and
industry?
JKUAT provides a
model
Agricultural transformation journey is yet to unfold
Industrial agro-processing
SMEs and Cottage
industry processing
Artisanal processing
What will it take?
• Framer processing groups
• Strong equipment
fabrication sector
• Gender friendly machines
• Business model to support
access to technology
Energy, infrastructure
and finance, managerial
skills and R&D are a
prerequisite to success
in processing
• Markets and product
development
• Capacity to navigate
regulatory framework
• Business support services
• Access to modern food
processing equipment
• Strong supply chains that
can guarantee sufficient
capacity utilization
• Well develop consumer
markets e.g. supermarkets
• Supportive industrial policy
A Multi-pronged Approach is Needed
Incentives
• Tax breaks to upgrade
equipment and
encourage local
content use
• Subsidies or a fund to
support R&D for new
products e.g. Nigeria
Cassava Bread Fund
Mandates
• Local content laws e.g.
5% sorghum bread
• Need to be sure that
undue burden is not
put processors.
Questions
• What should be subsidized? production vs processing
vs research vs market channels Vs promotion
• What is the role of policy (government)?
 How should food policy look like?
 How to harmonize industrial policy and agricultural
policy
 How do we align budgeting process so that it supports
emergence of strong value chains
PPPs
• PPPs can be used to
attract investors e.g.
Nissin factory in JKUAT
• PPPs need service
sectors that can deliver
very high levels of
services
How do we support the
emergence of a strong
service sector able to
catalyst the upgrading of
agricultural value chains
13
Questions
14
Innovations providing many opportunities for upgrading value chains
Innovations/
New
models/
Production
structure
Logistics
•Contract farming •Warehouse
•ICTs e.g. i-Cow
•Inputs model
 Franchising

receipt system
•Empowered
middlemen who
e.g. Farmshop provide a variety
of services
Inputs as a
(logistics)
service
• Use of drones
to curb quelea
birds
•New FBOs
(farmers within
specialize)
Processing
•Artisanal + SME
symbiotic
relationship
•Dual role
processors (buyer
of farmers output
+ selling inputs to
Be
farmers creating
dense
relationships)
•PPPs .g. Ehiopia
with Chinese sho
company
Marketing and
distribution
•Branding and
differentiation
(sorghum and
millet as
superfoods)
•School milk
program. But why
not dairy products
e.g. cheese and
yoghurts
Finance is the
lifeblood pf the whole
value chain and new
models are being
tried e.g. root capital
15
Market and trade policy can have important impacts
Partial simulation results (Impact of market structure and trade policy)
Agricultural
product
Dairy
Poultry
Sorghum
Millet
Impact of market change on farm-gate price (%)
Perfect
Competition
-4.8%
20.18%
-1.24%
-3.49%
International Price
(10% rise)
3.67%
27.82%
4.98%
5.86%
Combined (PC+IP)
• Farm gate price increase are fairly modest except for poultry.
This is because most markets are local and already highly
competitive
• International prices have important impact on farm gate prices
implying that trade policy is a potential powerful tool
• Also note that there can be huge complementarities as combined
effect tends to be larger than sum of impact
-0.12%
60.18%
4.14%
4.20%
Trade and
competition policy
are important tools
but should be very
well targeted
16
Questions
Dairy
Cassava
• An important staple for food
security (8% of total agriculture
output)
• Being investigated as potential
feedstock for beer industry and
as a substitute in the foodprocessing industry
•The meat and milk sectors make up 23% of agricultural output.
•Can replicate Kenya's model and develop a successful dairy industry
•Big potential local demand (consumption is 40 liters per person, compared
to 145 for Kenya)
Rice
•Increasing yield by 8% will close the country's rice deficit. Potential to
become a major export.
•A substantial regional market, as the region is a net rice importer (Kenya
imports close to 300,000 MT)
Cotton
•Important source of income and credit for farm inputs
•Potential to close the edible-oil deficit
•Can supply a growing textile industry in Kenya and the local and regional
animal feed industries
17