OFF‑FARM VALUE CHAIN and MARKET SYSTEMS ANALYSIS Feed the Future Ethiopia Livelihoods for Resilience – Oromia | Food for Peace Development Food Security Activity

OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Feed the Future Ethiopia Livelihoods for Resilience – Oromia | Food for Peace Development Food Security Activity

March 2018 Rural off‑farm activities are among the most common livelihood strategies of households responding to the adverse effects of climate change, land degradation and other shocks. They offer self‑employment opportunities and diversified sources of income, particularly to youth and landless people. Photo: geneward2/iStock

This publication was possible thanks to the generous support of the people of the United States of America, through the United States Agency for International Development. The contents are the responsibility of Catholic Relief Services and do not necessarily reflect the views of USAID or the United States Government.

A report for Catholic Relief Services Prepared by Loyya Consults, Addis Ababa, Ethiopia Contact: Beyene Tadesse Telephone: +251 911 52 33 30 Email: [email protected]

Technical editor: Solveig Bang Design and production: Bang Magnusson

Catholic Relief Services is the official international humanitarian agency of the United States Catholic community. CRS’ relief and development work is accomplished through programs of emergency response, HIV, health, agriculture, education, microfinance and peacebuilding. CRS eases suffering and provides assistance to people in need in more than 100 countries, without regard to race, religion or nationality.

Copyright © 2018 Catholic Relief Services. Any reproduction, translation, derivation, distribution or other use of this work is prohibited without the express permission of Catholic Relief Services (“CRS”). Please obtain permission from [email protected] or write to:

Catholic Relief Services 228 West Lexington Street Baltimore, MD 21201‑3443 USA 1.888.277.7575 crs.org CONTENTS

Figures & Tables ...... iv Glossary of local terms ...... v Acronyms...... vi 1. Executive summary...... 1 1.1. Introduction...... 1 1.2. Objectives...... 1 1.3. Methodological approach...... 1 1.4. Major findings...... 2 1.5. Summary...... 8 2. Introduction...... 9 2.1. Background...... 9 2.2. Objectives...... 10 2.3. Scope and limitations...... 11 3. Methodological approach...... 12 3.1. Data sources and collection methods...... 12 3.2. Data collection process...... 14 3.3. Data analysis methods...... 16 3.4. Review of policies, strategies and countries’ experiences...... 16

4. Identification and selection of off‑farm activities...... 18 4.1. Identification of off‑farm activities...... 18 4.2. Selection of off‑farm activities...... 18 4.3. Gender dimension of off‑farm activities...... 20 5. Value chain and market systems analyses of selected off‑farm activities...... 21 5.1. Value chain and market systems analysis of food catering shops...... 21 5.2. Value chain and market systems analysis of retail shops...... 29 5.3. Value chain and market systems analysis of baltina agro-processing...... 35 5.4. Value chain and market systems analysis of animal-drawn carts...... 40 5.5. Value chain and market systems analysis of woodwork...... 44 5.6. Value chain and market systems analysis of construction...... 48 5.7. Value chain and market systems analysis of sisal rope production ...... 51 5.8. Value chain and market systems analysis of hairdressing...... 55 5.9. Value chain and market systems analysis of bakeries...... 59 5.10. Value chain and market systems analysis of weaving...... 62 6. Technical support and stakeholders...... 65 6.1. Support providing bureaus and TVETs...... 65 6.2. Financial institutions...... 67 6.3. Nongovernmental organizations...... 68 7. General opportunities and challenges...... 69 8. Conclusions and intervention strategies...... 71 References...... 74 Annexes...... 75 Annex I: Checklists for Phase I...... 84 Annex II: Checklists for supply and demand situation analysis...... 85 FIGURES & TABLES

Figure 1: Value chain toolkit road map: key milestones 14 Figure 2: Injera served in Dole Village, Arsi Negele 22 Figure 3: Average initial investment cost for food catering (in Birr), by woreda 24 Figure 4: Value chain for food catering shops 24 Figure 5: Percentage share of major input costs in total costs of food catering shop 26 Figure 6: Average initial capital of retail shops, by woreda (in Birr) 30 Figure 7: Value chain for retail shops 30 Figure 8: Distribution of operating costs of retail shops, by woreda (%) 32 Figure 9: Average price margin of retail goods per unit (per kg or per piece) 33 Figure 10: Crushed raw peppers dry in the sun. Women retail ground pepper in a local market in Aje town 35 Figure 11: Level of start‑up capital for baltina, by woreda (in Birr), 36 Figure 12: Value chain for baltina agro-processing 37 Figure 13: Distribution (in percent) of input costs for baltina, by woreda 38 Figure 14: Donkey cart service in ATJK 40 Figure 15: Start‑up capital for animal-drawn carts, by woreda (in Birr) 41 Figure 16: Value chain for animal‑drawn carts 42 Figure 17: Distribution of operating costs (%) of animal-drawn carts, by woreda 42 Figure 18: Value chain for woodwork 45 Figure 19: Share of costs in average monthly woodwork operating cost 45 Figure 20: Average monthly costs, revenue and gross profit for woodwork (in Birr) 46 Figure 21: Value chain for construction 49 Figure 22: Average monthly costs, revenue and gross profit of construction (in Birr) 49 Figure 23: Sisal plant and rope made from sisal fibers 51 Figure 24: Value chain for sisal rope production and marketing 52 Figure 25: Initial investment cost of hairdressers, by woreda (in Birr) 56 Figure 26: Value chain for hairdressing 56 Figure 27: Share of input costs (%) for hairdressing, by woreda 57 Figure 28: Average monthly major input costs for bakeries (in Birr) 59 Figure 29: Average monthly costs, revenue and gross profit of bakeries (birr) 60 Figure 30: Value chain for bakeries 60 Figure 31: Average monthly operating costs for weaving (in Birr) 62 Figure 32: Value chain for weaving 63 Figure 33: Average monthly cost, revenue and gross profit of weaving (in Birr/month) 63

Table 1: Sample kebele distribution, by woreda and zone 13 Table 2: Respondents in the identification phase 15 Table 3: Participants in the assessment phase 16 Table 4: Weighting of criteria for off‑farm activities selection 19 Table 5: Selected off‑farm activities, by woreda 19 Table 6: Priority off‑farm activities, by gender 20 Table 7: Average monthly running costs of food catering shop (in Birr) 25 Table 8: Average monthly costs, revenue, gross profit and gross margin of food catering shops, by woreda 26 Table 9: Running costs of retail shops, by woreda (in Birr) 31 Table 10: Average monthly costs, revenue, profit and gross margin of retail shops, by woreda 32 Table 11: Major inputs and average monthly costs for baltina agro-processing, by woreda (in Birr) 37 Table 12: Average monthly costs, revenue and profit and gross margin for baltina agro-processing, by woreda (in Birr) 38 Table 13: Average monthly operating costs of animal-drawn carts, by woreda (in Birr) 41 Table 14: Average monthly costs, revenue, profit and gross margin of animal-drawn carts, by woreda (in Birr) 43 Table 15: Initial investment and working capital requirement for woodwork (in Birr) 44 Table 16: Average operating cost of woodwork business per month (in Birr) 45 Table 17: Initial cost of construction tools, Babile woreda (in Birr) 48 Table 18: Average monthly costs, revenue, gross profit and gross margin of sisal rope (in Birr) 53 Table 19: Average monthly operating costs of hairdressing, by woreda (in Birr) 57 Table 20: Average monthly costs, revenue, gross profit and gross margin for hairdressing, by woreda (in Birr) 57 GLOSSARY OF LOCAL TERMS

arake traditional fermented beverage aximit various cereals mixed with spices and milled into fine powder baltina chili pepper berbere spice mixture including chili peppers beso roasted barley and spices ground into a fine powder beyanet flatbread with sauce blocket bricks firfir shredded flatbread with butter and spices injera flatbread gabi handwoven cloth injera flatbread kask wash hair, and dry with hair dryer kawuya smoothen and straighten hair with hair irons kebele Smallest administrative unit below district kir machine-spun thread kororma Ethiopian cardamom mencha scythe-like agricultural tool mitad traditional frying pan mixin shiro chili mixed with beans/chickpeas and ground into a powder nifro boiled cereals and legumes sambusa samosa sherira a thin piece of wood used in construction shiro stew of chickpea/bean meal sheruba hairstyle using braids teff grain staple tella traditional beer tibs roasted oxen, goat or mutton woreda district zembil woven baskets

ACRONYMS

ATJK Adami Tullu Jido Kombolcha (woreda) COC Certificate of Competence CRS Catholic Relief Services CSA Central Statistical Agency DA development agent DFSA Development Food Security Activity FFP Food for Peace FGD focus group discussion FTC farmer training center GoE Government of Ethiopia GTP Growth and Transformation Plan (of Ethiopia) HCS Hararghe Catholic Secretariat HH household IGA income‑generating activity KII key informant interview kg kilogram km kilometer LG livelihood group LRO Feed the Future Ethiopia Livelihoods for Resilience – Oromia MCS Meki Catholic Secretariat MFI microfinance institution MOANR Ministry of Agriculture and Natural Resources MSE micro and small enterprise NGO nongovernmental organization OCSSCO Oromia Credit and Savings Share Company PCDP Pastoral Community Development Project PSNP Productive Safety Net Programme SACCO savings and credit cooperative TVET technical and vocational education and training TVETC technical and vocational education and training college TIN tax identification number YLG youth livelihood group 1. EXECUTIVE SUMMARY

1.1. Introduction Rural off‑farm activities are among the most common livelihood strategies of households responding to the adverse effects of climate change, land degradation and other shocks. They offer self‑employment opportunities and diversified sources of income, particularly important for those with limited opportunities and resources, such as women, youth and landless farmers. In response to the failure of agriculture to sustain rural livelihoods, and the huge demand for youth self‑employment, the Government of Ethiopia and development partners are increasingly focusing on the need to develop off‑farm activities. Among several initiatives, the Government of Ethiopia has focused on small businesses operating in urban centers and developed an Ethiopian Industrial Development Strategy. But the government has given limited attention to the development of off‑farm business activities in rural areas. CRS is filling such gaps through two programs: Feed the Future Ethiopia Livelihoods for Resilience – Oromia (LRO) and the Food for Peace Development Food Security Activity (DFSA). Both are aimed at sustainably building and improving rural livelihoods and reducing vulnerability to various shocks through income diversification into off‑farm activities. The LRO is a resilience‑building activity that aims to reach almost 30,000 Productive Safety Net Programme1 (PSNP) households, while the DFSA aims to reach 48,000 PSNP households with food security programming.

1.2. Objectives CRS initiated this study to establish a road map to guide implementation of off‑farm value chain development in 14 target areas in Oromia region and Dire Dawa city. The general objective of the study was to assess off‑farm value chains and market systems, and to identify key challenges and opportunities for small off‑farm businesses in the target program woredas (districts). Specifically, the study had four major objectives: (i) to identify and prioritize major off‑farm activities (especially for women and youth); (ii) to analyze in detail value chains and market systems for selected off‑farm products (focusing on actors, costs, revenue, gross margin, opportunities, constraints and challenges, etc.); (iii) to propose development strategies and strategic interventions to upgrade the value chains; and (iv) to develop model business plans for households to engage in the identified off‑farm value chains.

1.3. Methodological approach Multidisciplinary teams of consultants were deployed to generate data from primary and secondary sources. Various existing reports were reviewed, including those from government organizations (federal, regional, zonal and woreda-level), such as Growth and Transformation Plan (GTP) performance reports. Others included related progress reports from Micro and Small Enterprises Development bureaus; the Women and Children’s Affairs bureau; the Central Statistical Agency (CSA); the Productive Safety Net Programme (PSNP); and the Pastoral Community Development Project (PCDP). Reports from various nongovernmental organizations (NGOs) operating in the study areas and other relevant sources were also consulted. The study reviewed research findings from other countries (Kenya, Tanzania, etc.) to gain an understanding of off‑farm activities as complementary livelihood resources in food‑insecure areas.

1. Productive Safety Net Programme: The Government of Ethiopia, the World Food Program and development partners work together to increase families’ long-term resilience to food shortages.

1 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Primary data was collected directly from rural households and key informants. This process had two phases: Phase I included identification and prioritization of off‑farm activities, and Phase II was a detailed value chain and market systems analysis. In each, the CRS Value Chain Toolkit was used as a guideline for off‑farm activities. The primary data was collected from 14 intervention woredas in the Oromia region and Dire Dawa city, with 2 sample kebeles (neighborhoods) in each woreda, for a total of 28 kebeles (14 from peri‑urban2 areas and 14 from rural areas). At least 1 focus group discussion (FGD) was carried out each with men, women and youth separately, for at least 3 FGDs per kebele. Key informant interviews (KIIs) were also held with relevant woreda and kebele experts, kebele administrations and knowledgeable elders. Both quantitative and qualitative data was collected through FGDs and KIIs focusing on women and youth (both male and female), using checklists (See Annex 1) to identify existing off‑farm business activities in all target woredas.

A list of off‑farm activities was then presented at a workshop organized by CRS to identify the most relevant ones, in the context of the project objectives and based on the interests of the communities, using the impact and feasibility criteria from the CRS Value Chain Toolkit. The final off‑farm activities selected included food catering shops, retail shops, animal‑drawn carts, agro‑processing of baltina (a hot pepper processed in various forms), hairdressing, sisal rope production, construction, woodwork, bakeries and weaving. In the second phase of the study, the team of consultants undertook detailed value chain and market systems analysis to collect further detailed information from operators of these small businesses. The data was then organized thematically, analyzed and presented as graphs.

This report presents the market characteristics, key market actors and their roles, and the financial profitability of the selected off‑farm activities. In addition, opportunities, challenges and intervention development strategies are included.

1.4. Major findings Off‑farm activities in the study areas were generally weak in value chain development and had poorly functioning market systems. The activities are often at a subsistence level, and the participants driven by survival rather than by profit. They are an attempt to generate income mainly to supplement the livelihoods of the operators and their families. Nevertheless, the gross profit of all the selected off‑farm activities was found to be positive (although not always high) even when taking into account the opportunity cost. This indicates that the economic benefit to the operators was moderately good given the economic status of the participants in PSNP areas. The operators were self‑employed, earned their “wages” at the market rate, and generated a modest profit. More detailed key findings are thematically summarized as follows:

Food catering shops This off‑farm activity was found in almost all target woredas, except Deder, Malka Balo and Midega Tola. In the study woredas, small food catering businesses were owned and operated by entrepreneurial youth (both male and female) and survival‑oriented women. These operators prepared food and beverages using inputs such as grain, vegetables, spices, cooking oil, and consumer goods obtained from farmers and traders. Their customers were community members (farmers, laborers, civil servants and commuters, etc.). All operators depended on their own financial resources for initial capital, which ranged from 3,750 Birr in Arsi Negele to over 22,000 Birr in Dodota. Most operators had received no formal skills training from technical and vocational education training (TVET) institutions; rather they ran their businesses based on their own experience.

2. Peri‑urban kebeles are those located immediately around towns.

2 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS The average monthly cost of running a food catering outlet—which included the opportunity cost of operators—varied by location within woredas, by the size of the business, and across woredas, with the lowest reported in Dodota (10,000 Birr) and the highest in ATJK and Siraro (15,000 Birr). The average monthly revenue varied from 12,600 Birr in Arsi Negele to 19,000 Birr in ATJK. The highest monthly gross profit was reported in ATJK (3,900 Birr) while the lowest was reported in Arsi Negele (2,000 Birr). The gross margin,3 which measures the stability and profitability of a business, ranged from 18 to 21 percent, indicating that food catering is a profitable business.

Key opportunities in food catering have arisen from cultural and behavioral changes, where both the rural and urban population, mainly youth, have begun consuming prepared food from catering outlets. Better education and information via social media exposes youth to global information, and eating out has become aspirational. One of the challenges facing food outlets is poor food hygiene and safety, arising from poor sanitation. Local foods are prepared in the open air, exposing them to dust and germs. Other challenges include the increasing prices and critical shortage of key inputs, such as cooking oil and sugar. Strategic interventions proposed included offering skills training to improve hygiene and sanitation, and enhancing market linkages and stock capacity to ensure the continuous supply of raw materials.

Retail shops Retail shops were present in all woredas, except Malka Balo. The shops were mostly owned by educated youth (both male and female). The start‑up capital was raised from their own resources, as formal financial institutions were reluctant to provide credit due to a lack of collateral. Start‑up capital varied, from 4,000 Birr in Shala, to 12,850 in Dodota. Because of the rural context and the limited scope of the business, running a small retail shop does not require much specialized or technical skill, and hence most youth (both male and female) in small towns and villages are involved in this business. Shops sold various consumer goods—including sugar, coffee, candy, chewing gum, manufactured biscuits, cosmetics, detergents, soft drinks and bottled water, macaroni and spaghetti, stationery (exercise books and pens), etc. These were supplied by wholesalers and traders in zonal and woreda towns. Major customers were all local consumers. Price markup ranged from 10 cents per piece of chewing gum to 10 Birr per kilogram of coffee.

The average monthly gross profit (including the opportunity cost) varied from 472 Birr in Dodota to 1,310 Birr in Babile. The gross margin ranged from 5.2 percent in Deder to 12 percent in Babile. This indicates that retail shops are profitable, but less so than food catering outlets. The opportunity costs of the operators’ labor were calculated using the current local market rate. The monthly net profit was additional income (on top of the amount that had been paid for the operators’ “wages”).

The trend toward substitution of traditional food items with modern commodities—e.g., cooking oil for butter, as the latter is either too expensive or in limited supply—and the ever‑increasing demand among rural people for commercial food and non‑food products creates an opportunity for shop-owners. Major challenges of running retail shops include price fluctuations, increasing rental costs, and critical shortages of some consumer goods, such as sugar and cooking oil. Strategic interventions could include improving market linkages to smooth the flow of input supply and stabilize prices, and lobbying local government to provide working premises at reasonable rentals.

3. Total sales revenue minus costs, divided by total sales revenue, expressed as a percentage.

3 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Baltina agro-processing The baltina (chili pepper) business is most important in Boset, Arsi Negele, Shala and Siraro. It involves the preparation of hot chili pepper, mixin shiro (chili mixed with beans/peas and ground into powder), and beso (barley and spices ground into a powder). Processed hot chili and other products are retailed in local markets to local buyers (farmers, residents of small towns). The inputs used in baltina agro-processing are raw pepper, spices, barley, beans/peas, salt, etc., which are supplied by farmers and traders/retailers in the community. The baltina businesses were entirely owned and operated by women and girls on a small scale. The start‑up capital ranged from 4,500 Birr in Shala to about 8,500 Birr in Boset. The businesses depended heavily on buying raw pepper on credit from traders in towns (such as Alaba in the Southern Nations, Nationalities and Peoples’ region), who buy raw pepper from farmers and then store it. The women process hot chili traditionally using a pestle and mortar and/or semi‑modern methods.

The average cost of processing baltina products, which included opportunity cost, ranged from 2,660 Birr in Arsi Negele to over 4,500 Birr in Boset. The average revenue, gross profit and gross margin varied by location and size of the business. In Arsi Negele, the monthly gross margin was 1,300 Birr, in Shala it was 1,100 Birr and in Siraro, 950 Birr. The opportunity cost of the operators’ labor was calculated using current local market rates. The average monthly income was additional income after opportunity costs had been taken into account.

Opportunities presented by the business include the existence of a ready supply of raw materials from the farming communities (raw pepper production) in the kebeles of Arsi Negele, Shala, Siraro, Boset and adjacent woredas (e.g. Alaba). A major challenge that hinders the growth of the baltina business is that the young women who participate are constrained by their household tasks. Another challenge is the lack of appropriate processing technologies, and limited market linkages to potential customers in urban markets, such as hotels, hospitals, universities, etc. Critical strategic interventions might include creating better awareness of young women’s household labor commitments to encourage their greater participation in the business (as girls have unfair workloads in the home and are thus constrained in the number of hours they can spend in the baltina business); strengthening market linkages with potential high‑volume consumers by improving the quality and productivity of smallholder chili processors; and providing improved processing technologies. The hygiene and food safety factors that affect food catering also affect the baltina business, and these need regulation by local authorities.

Animal‑drawn carts Donkey‑ and horse‑drawn carts in Arsi Negele, ATJK, Dodota and Ziway Dugda were operated mainly by male youth, as the work requires physical strength. The initial investment cost differed for horse and donkey carts: for horse carts, the initial investment was between 18,000 and 19,000 Birr, while for donkey carts it was 8,000 to 9,000 Birr, due to the higher price of horses and horse carts. Operators had raised the initial investment from their own resources and resources from family/relatives. Much of the investment was made up of the cost of buying the animal and the cart. Other inputs included animal feed and the animal’s health care. While the carts were bought from local workshops in woreda towns, the animals and feed were supplied by local farms. Animal health service agents (both public and private) provided health services. Such carts transport people and their goods from place to place, mainly between their homes and market places. The service providers live in the community and provide the service to that community.

The average monthly running cost of a cart service ranged from 2,470 Birr in ATJK to over 2,600 Birr in Ziway Dugda, and the business generated a monthly revenue of 2,500 to 2,900 Birr.

4 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS The gross profit ranged from as low as about 25 Birr in Arsi Negele to 300 Birr in Dodota. The gross margin was the lowest of all off‑farm activities analyzed (1 percent in Arsi Negele and a maximum of 11 percent in Dodota). Although the gross profit was low, given the economic context of the PSNP communities, animal‑drawn carts still offer a viable business opportunity that pays the operators their daily opportunity costs (“wages”) at the market rate to support their families.

The increasing mobility of people between urban and rural areas for the marketing of goods and services, and for social activities, has created opportunities for the cart business. The recent construction of rural roads to connect villages to urban centers has facilitated the business, despite the roads’ limited quality. Major challenges include competition from three‑wheel Bajajs and motorbike transport services. The inconvenience of cart transportation during rainy and windy weather reduces the attractiveness of this form of transport to consumers. Strategic interventions could include improving carts by introducing more comfortable seating, and roofs and sides for protection from the elements.

Woodwork Business operators were often youth (mostly young men) who were graduates of TVET institutions or universities, and/or individuals with relevant experience. Such businesses are owned individually, in partnerships, or in groups. The major products are chairs, tables, beds, shelves, sofas, benches, doors, windows, etc. The major inputs are machinery, wood, nails, paint and varnish, supplied by local traders and government institutions (e.g., government‑owned forestry enterprises like Oromia Forest and Wildlife Enterprise). Customers are government institutions, NGOs and inhabitants of towns and villages.

Woodwork is a capital‑ and skills‑intensive business, requiring an average initial capital of up to 29,500 Birr. The average monthly cost of running a woodwork shop (including opportunity cost, raw materials, electricity, etc.) was about 44,550 Birr, with an average monthly revenue of 60,000 Birr, and hence an average monthly gross profit of 15,450 Birr. While this business was the most profitable of all the selected off‑farm activities, it was also the most expensive to run, making it less appropriate for PSNP households.

Booming construction in the government and private sectors has created opportunities for woodwork businesses by increasing demand for fittings and furniture. Many government institutions, such as schools and health centers, have been established in local communities, and individual households are improving their homes, boosting the demand for woodwork products. The sector has also been prioritized by government and has thus been given support such as premises/sheds, facilitated market linkages and some technical training. Major challenges include the limited supply and low quality of raw materials. The business requires high‑voltage electric power that is feasible only in urban areas and non‑existent in rural areas.

Strategic interventions could include improving the quality and diversity of products through skills training; strengthening market linkages to improve access to raw materials; improving the sustainability of the supply of raw materials; and lobbying government to supply electric power in rural areas.

5 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Construction Construction can broadly include masonry, painting, the installation of sanitary systems, electrical work, and other related activities. The business is skills‑intensive but does not require much capital. Tools required include hammers, measuring tapes, saws, plumb bobs, spirit levels, etc. The businesses in the study areas were owned by male youth and adults (individually or organized into groups). These operators often had relevant previous experience or were graduates of TVETCs or universities. Operators mainly construct brick houses in urban and peri‑urban areas. They offer only their labor, skills and tools while the clients source the construction materials. The initial cost to buy basic tools was estimated at about 6,660 Birr.

Construction‑related businesses generated an average monthly revenue of 40,000 Birr and a gross profit of 9,200 Birr. The gross margin was 23 percent, indicating that this sector is profitable and stable. Opportunities include expansion of the sector and government help. But seasonality and deep‑rooted corruption in the sector are major challenges. Strategic interventions could include skills upgrading, creating access to credit to buy basic tools, organizing operators as micro and small enterprises to compete more effectively in the market, and facilitating further linkages of operators with private and public construction sectors.

Sisal rope production In Midega Tola, women traditionally produce sisal ropes by collecting wild sisal leaves using simple hand tools. They then manually separate the fibers from the leaves and make the rope. It is marketed mainly to local traders who in turn trade it in more distant areas like Awaday, Harar and Dire Dawa. Tens of thousands of bundles of ropes are traded every week.

Since sisal rope production is traditionally done using simple hand tools, the start‑up capital is negligible and hence the cost of production is made up mostly of the opportunity cost of labor, estimated at about 400 Birr per month. The average monthly revenue was about 510 Birr, resulting in a monthly gross profit of 110 Birr. Although the gross margin seems small at 21.6 percent, the operators covered at least their equivalent market wage and generated a further 110 Birr.

Opportunities include a high potential for small‑scale commercialization of sisal production by smallholder farmers in east Hararghe due to the suitable agro‑ecological conditions of the zone, and the high and stable demand for the product. Major challenges include a lack of appropriate support from government and NGOs to commercialize; an absence of technical support like training; and an absence of appropriate technology for fiber production and processing. Strategic interventions could therefore include commercialization of sisal production by providing technical skills training to improve quality and product diversification, domesticating sisal plants with improved agronomic practices, and developing better processing technology (such as fiber‑separation facilities).

Hairdressing This business is both skills‑ and capital‑intensive. Graduates or experienced youth (male and female) run hairdressers in small towns and villages using electric power or diesel generators. The business was identified in Boset, Dodota, Dire Dawa and Sire.

The initial investment cost was higher for female hairdressing (about 15,920 Birr) than for male hairdressing (about 6,385 Birr) because the former needs more equipment. The average running cost (including opportunity cost) for female hairdressing was 4,983 Birr per month. The monthly

6 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS revenue was 6,080 Birr and the gross margin 20 percent. However, revenue and gross margin were much lower for male hairdressers: about 2,520 Birr for running costs, total revenue of 3,060 Birr and 17 percent gross margin per month. This implies that female hairdressing is more profitable mainly because of a higher turnover and higher prices charged per service.

Opportunities for hairdressing include a growing awareness among youth and other rural dwellers of personal care/appearance, and the existence of governmental institutions like TVETC and private training centers. However, the limited skills of operators and a lack of basic infrastructure such as electric power are key challenges. Strategic interventions could include offering skills training and ensuring access to electric power (for example, solar energy).

Bakeries Bakery businesses were identified in peri‑urban areas and villages in Deder, Malka Balo and Dire Dawa, and in the eastern part of the project intervention woredas. The inputs for bakeries are wheat flour, salt, firewood and baking equipment such as mixers and ovens. The cost of equipment ranged from 15,000 to 30,000 Birr depending on the size. The operators were mostly better‑off men, as women and youths could not raise the required initial capital. The major products are bread and biscuits, with customers including households (for home consumption), shops (for retailing), and cafes, restaurants and tea houses (for bread to sell with tea). The average monthly revenue was 37,800 Birr with average monthly gross profit of 9,600 Birr. The gross margin in the study woredas was over 25 percent, indicating that the business is profitable.

Opportunities include the increasing level of urbanization and incomes of rural households. Major challenges are a limited supply of raw materials like wheat flour (Ethiopia imports wheat), limited product diversification, and poor access to electric power. Strategic interventions could include better market linkages to ensure a smooth flow of raw materials, skills training to diversify products, and improving access to basic infrastructure such as electric power. Hygiene and food safety concerns could also be addressed through relevant regulations.

Weaving Weaving businesses are owned and operated by adult men with skills learnt from their fathers. In most villages and the peri‑urban areas of Deder and Malka Balo, weavers have low social status and are economically the poorest, with limited land resources for agricultural activities. The operators use locally made traditional tools and produce items such as single and double handmade gabi cloth for local markets. The average initial investment cost is estimated at 3,200 Birr, with an average monthly revenue and gross profit of about 8,000 Birr and 800 Birr respectively. The gross margin for weaving is about 10 percent, indicating that the business is not making an attractive profit. As the increasing demand for weaving products presents a significant opportunity, supporting weavers with skills training to produce better designed and higher‑quality traditional clothes, access to modern inputs, and access to working space could be strategic intervention areas to uplift the value chain development of weaving activities.

7 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 1.5. Summary Increasing urbanization; growing disposable household income; cultural and behavioral changes towards fashion and personal care; increased consumption of ready‑made (processed) food and non‑food items; stronger rural and urban linkages; decentralization of government institutions to the grassroots level; and the suitability of off‑farm activities for youth and women, offer good opportunities for the development and growth of these value chains. However, there are common challenges confronting the sector. A lack of skills to produce quality and diversified products; a lack of start‑up capital (poor access to credit); weak entrepreneurship; weak market linkages; an absence of improved technology; a lack of electricity and water supplies; and an absence of working premises, are limiting the scale, efficiency, quality and profitability of off‑farm activities.

Therefore, in the short term, skills training in thematic areas (production, marketing, bookkeeping, entrepreneurship, etc.); facilitating market linkages; creating access to credit (through savings groups like SILC); making working premises available; and the introduction of appropriate production and processing technology are identified as key intervention strategies. In the medium to long term, improving the supply of water and electric power, by lobbying the government and local authorities, is imperative for sustainable commercialization and the development of off‑farm value chains.

While many off‑farm activities do have the potential for development if the recommended interventions are in place, the sustainability of animal‑drawn cart businesses is doubtful because of competition from modern vehicles. Also, the lack of electric power in the rural areas (small villages) means woodwork activities have few development prospects in the short term. Therefore, the consulting team has reservations about recommending investment in interventions around animal‑drawn cart services and woodwork activities.

8 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 2. INTRODUCTION

2.1. Background The Sustainable Livelihoods Approach perceives rural off‑ and non‑farm activities as livelihood strategies of rural households diversifying in response to ‘push’ or ‘pull’ factors. Many scholars believe that farming as a primary source of income has failed or at least is under pressure to guarantee a sufficient livelihood for most farming households in developing countries, especially in Sub‑Saharan Africa, where countries are highly vulnerable to climate change (Gesese 2012).

As a result, diversification into off‑farm activities has become the norm. Development economics literature has identified pull and push factors that drive diversification into off‑farm activities among farm households in developing countries. The pull factors are higher returns on labor and/or capital and the less risky nature of investment in the off‑farm sector, when compared to on‑farm activities. The push factors are the need to increase family income when farm income alone cannot provide a sufficient livelihood, due to a shortage of land and declining farm productivity; the desire to manage agricultural production and market risks in the face of a missing insurance market; and the need to earn income to finance farm investment in the absence of a functioning credit market (Babatunde 2016).

Other studies have indicated that in many rural areas, agriculture alone cannot provide sufficient livelihood opportunities for women, youth and landless farmers; and migration to urban areas in search of jobs is not an option for everyone. In such cases, rural off‑farm businesses can play a potentially significant role in reducing rural poverty (Gordon and Craig 2001). Some studies maintain that, although agriculture remains the main source of livelihood for the majority of people in most African countries, in Sub‑Saharan Africa, rural households that rely solely on agriculture for their livelihoods are very few. For instance, in Tanzania, between 60 and 80 percent of rural household income is derived from non‑farm sources (Katega and Lifuliro 2015).

The economy of Ethiopia is mainly based on rainfed agriculture, which is the source of livelihoods for most of its population. Most households in rural Ethiopia are poor, often face income fluctuation, and have erratic consumption patterns due to price changes, weather‑related shocks, pests, and the death and illness of family members as well as livestock. Besides, the increasing population growth in rural Ethiopia forces households to make their living on extremely small portions of land of less than 1 hectare per household on average.

CRS Ethiopia is implementing two projects; namely, Feed the Future Ethiopia Livelihoods for Resilience – Oromia, and the Food for Peace Development Food Security Activity. Geographically, the two programs overlap in four woredas—Arsi Negele, Shala, Heben Arsi and Ziway Dugda. The projects also share thematic and technical commonalities in such areas as livelihoods, gender, nutrition and market systems.

The LRO program, which aims to reach 24,500 Productive Safety Net Programme (PSNP) households, is implemented in nine woredas across the three zones of West Arsi, East Shoa and Arsi of Oromia state. The target woredas include Arsi Negele, Heben Arsi, Shala, Siraro, Adami Tullu Jido Kombolcha (ATJK), Boset, Ziway Dugda, Dodota and Sire. The program is a household

9 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS and community resilience‑building activity implemented by CRS and its partner, Meki Catholic Secretariat (MCS). It runs from February 1, 2017, through January 31, 2022, and aims to achieve four key objectives: increased income and diversification through on‑farm crop opportunities; increased income and diversification through off‑farm livelihood options; increased income from gainful self‑employment; and increased innovation, scaling and sustainability of livelihood pathways.

The DFSA is an initiative to sustain and build upon previous food security improvements achieved under the Government of Ethiopia’s framework of the PSNP. It is implemented by CRS, Mercy Corps, MCS and Hararghe Catholic Secretariat (HCS) in three zones (East Hararghe, West Arsi, and Arsi) of Oromia state, and Dire Dawa city. It targets nine woredas across the three administrative zones—namely Deder, Malka Balo, Midega Tola, Babile, Arsi Negele, Heben Arsi, Shala, Ziway Dugda, and the city of Dire Dawa. The program covers the period from September 30, 2016, through September 29, 2021, and plans to serve 48,125 PSNP households across four livelihoods zones. It envisions that the food, nutrition and livelihoods security of households and communities will be improved and sustained. The program specifically intends to meet four objectives: (i) Women and youth have increased access to and control of community and household resources (Cross cutting); (ii) GoE and community systems have reduced communities’ and households’ vulnerability to shocks (Purpose I); (iii) Households have improved their sustainable livelihood and economic wellbeing (Purpose II); and (iv) Pregnant and lactating women, and children under five, have improved nutritional status (Purpose III).

2.2. Objectives The off‑farm market systems analysis was intended to provide both the LRO and DFSA programs with a road map to guide implementation of off‑farm value chain and market systems development in the target areas of Oromia region and Dire Dawa city. Value chain development and upgrading will enable livelihood groups (LGs), youth livelihood groups (YLGs), and income‑generating activity (IGA) groups to develop inclusive, competitive and resilient value chains that are gender and youth sensitive, and as well as nutrition sensitive. This in turn will help producers (men, women and youth) prepare for and engage in sustainable value chains and markets for economic growth and poverty alleviation.

Given the overall intended purpose of the analysis, the assessment was expected to address the following objectives:

1. Identify potential off‑farm value chains suitable for project beneficiaries, especially women and youth. 2. Identify and analyze business opportunities and the potential of off‑farm value chains. 3. Identify and analyze constraints/bottlenecks across the off‑farm value chains. 4. Prioritize off‑farm value chains feasible for women and youth. 5. Identify key actors/stakeholders/supporters of the off‑farm value chains, from input supply to final use. 6. Design strategies for developing and upgrading the value chains of the selected activities. 7. Develop model business plans for households to engage in identified off‑farm value chains 8. Identify actionable interventions for projects to improve the competitiveness of off‑farm value chains. 9. Identify off‑farm value chains that could be replicated in similar non‑target woredas to promote household livelihood capacities. 10. Analyze the regional (Oromia and Dire Dawa) and national policy frameworks for off‑farm value chain and market systems development.

10 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 2.3 Scope and Limitations Geographically and administratively, the off‑farm market systems analysis covered 14 target woredas in Oromia and Dire Dawa. Thematically, the scope of the assessment included the following:

1. Review relevant policy frameworks for off‑farm value chain development and upgrading. 2. Profile and document all available off‑farm activities undertaken to supplement the livelihoods. 3. Identify, in consultation with stakeholders, and analyze, potential off‑farm value chains and their key actors. 4. Prioritize off‑farm value chains with a set of criteria for socioeconomic benefits and feasibility, specifically for women and youth. 5. Identify market constraints, and design actionable strategic intervention areas. 6. Produce model business plans for interested PSNP households to engage in off‑farm value chains.

The assessment depended on primary qualitative and quantitative data. Owing to inadequate earlier research and development interventions, time series data was not available for some basic variables (such as prices, volume of production and market supplies for food catering, animal‑drawn carts, woodwork, hairdressing, and sisal rope production). In most cases, the Central Statistical Agency collects information on the producer and consumer prices of agricultural products. We also made an extensive review of literature available online. Thus, this document provides vital information for development practitioners interested in value chain development interventions for selected products.

11 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 3. METHODOLOGICAL APPROACH

3.1. Data Sources and Collection Methods The team of consultants generated data from primary sources and triangulated it to ensure its consistency, credibility and validity. Both quantitative and qualitative information was collected from primary sources mainly through focus group discussions and key informant interviews, focusing on women and youth (both male and female).

Secondary sources Secondary data was generated from the following sources: • Government reports Annual, biannual and quarterly reports of government institutions at the federal, regional, zonal and woreda levels, including the Growth and Transformation Plan I/II; Micro and Small Enterprise Development bureaus; Women and Children’s Affairs bureaus; the Central Statistical Agency; Productive Safety Net Programme reports; and the Pastoral Communities Development Project. • Government policies and strategy documents related to creating self‑employment opportunities in off‑farm activities, including GTP II, the Micro and Small Enterprise Development Strategy; and food security strategies. • NGO and academic studies Reports by NGOs operating in the study areas, as well as studies by academics and development partners on the identified off‑farm activities, management practices, market engagement, and domestic and regional trade movements. • Review of country experiences Research findings of other countries, including Kenya and Tanzania, to generate best practices and experiences of off‑farm value chains in food‑insecure areas. • CRS guidelines for off‑farm activities.

Primary sources The study solicited first‑hand information from primary value chain actors of off‑farm activities (producers/processors, traders, retailers, brokers and consumers) and support‑providing institutions within and outside of government. Using FGDs and KIIs, relevant primary information was generated from 14 woredas in 4 zones and 1 city. The 4 intervention sites were located in the eastern Rift Valley areas of Oromia state: East Hararghe zone (4 woredas), East Shoa (2 woredas), Arsi (3 woredas), West Arsi (4 woredas) and Dire Dawa city (considered as 1 woreda). In each woreda, 2 sample kebeles were selected based on the concentration of off‑farm activities from the target PSNP woredas, for a total of 28 kebeles. Since the off‑farm opportunities and access to markets are different for rural and peri‑urban kebeles, the sample consisted of 14 kebeles from peri‑urban4 areas and 14 from rural areas. In each kebele, we carried out 2 to 4 FGDs with women and youth (male and female) who owned and operated small businesses. The distribution of the sample kebeles is summarized in Table 1.

4. Peri‑urban kebeles are those located immediately around the administrative city of the woredas or small towns.

12 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Data was obtained from both primary and secondary sources. The secondary data was elicited from various institutions using secondary data collection templates, while the primary data was collected from value chain actors and other relevant stakeholders via FGDs and KIIs, using primary data collection tools, mainly checklists (see Annex 1).

Table 1: Sample kebele distribution by woreda and zone

Zone/city Sample woreda Sample kebele Peri‑urban Rural kebele Total kebeles kebele East Hararghe Babile 1 1 2 Deder 1 1 2 Midega Tola 1 1 2 Malka Balo 1 1 2 Dire Dawa Dire Dawa 1 1 2 Arsi Dodota 1 1 2 Sire 1 1 2 Ziway Dugda 1 1 2 West Arsi Arsi Negele 1 1 2 Heben Arsi 1 1 2 Shala 1 1 2 Siraro 1 1 2 East Shoa Adami Tulu Jido Kombolcha 1 1 2 Boset 1 1 2 Total 14 14 14 28

Observation The team of consultants made personal observations about the nature, existence and potential of off‑farm activities in the target woredas.

13 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 3.2. Data Collection Process The team of consultants used the CRS Value Chain Toolkit (see Figure 1) focusing on the first two phases: defining the scope of the exercise and building a strategy. The main issues addressed using the toolkit were territorial analysis, value chain prioritization filter, market opportunity identification, rapid market appraisal, value chain mapping and value chain strategy development.

Figure 1: Value chain toolkit road map: key milestones Measuring performance

Performance management (MEAL)

Value chain strategy Building a development Financial Delivering strategy services solutions Enabling public policy environment Market opportunity idenfication Value chain Value chain ICT solutions mapping Value chain project set‑up: prioritization Partnerships, filter Rapid market governance and Private sector Defining appraisal facilitation engagement the scope Farmer organization / agro‑entrepreneur Territorial analysis identification and strengthening Starting point RFA/RFP announced

Starting point Country program/region decides to conduct value chain visioning/scoping exercise

Defining the scope of the study and identifying the focus activities In this phase, two basic questions were asked: (1) What are the most important off‑farm activities? and (2) What are the selection/ranking criteria? The activities for value chain development interventions were selected on the basis of various criteria—developed by CRS and modified by the consultants—such as feasibility and impact.

During the identification phase, the consultants made the assessment using KIIs with senior experts in line ministries and agencies at the federal level, and line departments in bureaus at the regional, zonal and woreda levels. FGDs were conducted with kebele administrations (food security task force) and experts/development agents (DAs); NGOs; local communities (women, landless men, youths, etc.), women and youth associations, cooperatives and unions. Table 2 summarizes the KIIs and FGDs at various levels for identification of potential off‑farm activities for value chain analysis.

14 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Table 2: Respondents in the identification phase

Level Respondents Data collection method Federal Micro and Small Enterprises Development Agency KIIs Federal Urban Job Creation and Food Security Agency KIIs Food Security Directorate (Ministry of Agriculture and Natural Resources) KIIs Ministry of Labor and Social Affairs (and bureaus) KIIs Women and Children’s Affairs Bureau KIIs Women and youth associations KIIs Federal and Woreda‑level TVET institutions KIIs woreda levels Sport and Youth Bureau KIIs Labor and Social Affairs Bureau KIIs Cooperatives and Market Development Bureau KIIs Trade and Industry Bureau KIIs NGOs (Hundee and Save the Children) KIIs Cooperatives and unions KIIs Kebele administration (food security task force) and DAs FGDs Community leaders/elders KIIs Kebele level Women and youth associations FGDs Local communities (women, and youth aged 15‑29 and mixed beneficiaries, FGDs one FGD per group from each category)

Market assessment and strategy development The list of off‑farm activities identified across the target woredas in the first phase was presented in a one‑day workshop for discussion with CRS. Certain activities were prioritized and selected based on impact and feasibility criteria (See Table 4). Then, the second phase of the field visit focused on an analysis of the supply‑and‑demand situation within the selected off‑farm activities.

The data in this phase, generated from primary sources, was gathered from value chain actors (producers, processors, traders, retailers and consumers); service providers (input suppliers, financial services providers, training providers, cooperatives and unions, etc.) and NGOs operating in the areas.

At the woreda level (i.e. in urban centers and towns), the consultants carried out FGDs and/or KIIs with service‑providing institutions (governmental, NGO and private sector) including the Federal Urban Job Creation and Food Security Agency, woreda‑level TVET institutions, financial institutions (MFIs), and small business owners. In peri‑urban and rural kebeles, FGDs and KIIs were carried out with small business owners and operators, most of whom were youth and women.

15 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Table 3: Participants in the assessment phase

Level Respondents Data collection method Federal Urban Job Creation and Food Security Agency KIIs Woreda‑level TVET institutions KIIs Woreda/town level Processors KIIs Retailers KIIs Consumers KIIs Retail shop owners KIIs Food caterers FGDs Hairdressers KIIs Construction businesses KIIs Kebele level Woodwork businesses KIIs (peri‑urban and rural kebeles) Baltina processors KIIs Sisal rope producers KIIs Bakeries KIIs Weavers KIIs Animal-drawn carts KIIs

At the woreda and kebele levels, relevant information on inputs, processing, prices, sales/ consumption, main actors, challenges related to production and marketing, support provision, etc. were collected via FGDs and KIIs.

3.3. Data Analysis Methods A narrative analysis was carried out for qualitative data generated through FGDs and KII. The team of consultants employed descriptive statistics for quantitative data like averages, and summary results were presented in graphs and charts. In the analysis, value addition of the selected off‑farm activities, total cost (raw materials, labor costs including opportunity cost5 of owners/operators and other costs like rent, transportation, water and electricity), revenue and gross margin were calculated to ascertain the viability of each off‑farm business. The gross profit was obtained after all costs and the wages of the owners had been included.

3.4. Review of Policies, Strategies and Countries’ Experiences

Review of Ethiopia’s policies and strategies In the last few decades, Ethiopia has focused on transforming its economic engine from agriculture to industry. As micro and small enterprises have the potential to generate employment and create value in off‑farm activities, the country has emphasized these as vital to its overall economic growth. The country’s Micro and Small Enterprises Development Strategy, introduced in 1997, aimed to create an enabling and conducive environment for the development of MSEs. In 2011, this strategy was revised with a vision of creating a “competitive and convenient base for industry development.” It has three key objectives: (i) creating job opportunities, ensuring equity and improving the wellbeing of society; (ii) creating competitive MSEs that lay a foundation for industrialization; and (iii) ensuring an emergence of developmental investors in urban centers. The first objective provides the short‑term direction, while the second and third are medium and long‑term policy trajectories, mainly focused on small businesses in towns and cities.

5. To calculate the opportunity costs of labor (owners/operators), the study team asked each operator how many hours they spent in their business and estimated the cost using the local wage rate.

16 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS In 2013, the country launched the Ethiopian Industrial Development Strategic Plan (2013‑2015) that highlights industrial growth to realize the vision of becoming a lower middle‑income economy by 2025, and the necessary institutional set‑up and governance framework needed to undertake this industrial transformation process. MSEs in general and the manufacturing sector in particular are to play pivotal roles. According to the strategic plan, manufacturing sector transformation can be achieved by upgrading and building the capacity of major priority industries (among them MSEs); diversifying the manufacturing sector; enterprise cultivation; private and public investment; and industrial zone development. The industrial development rests on four strategic pillars: (i) sustaining the MSE sector’s contribution to industry and economic growth, (ii) ensuring balanced regional industrial development, (iii) integrating Ethiopian industries into regional and global markets and development, and (iv) pursuing both export‑led and import‑substitution industrialization. Thus, to facilitate the industrial development of the nation, it is vital to investigate the major constraints to manufacturing MSEs in towns and rural areas.

The Growth and Transformation Plans (GTP I and II) of the country also emphasized MSEs as significant sources of job opportunities and enhanced economic growth, and as contributing to poverty reduction, especially in urban centers. The GTPs have aimed to guide efforts to increase the productivity of existing firms as well as creating a conducive environment for the establishment of new ones through various policy incentives. Thus, GTP I and II give general strategic direction toward developing small businesses both in urban and rural areas, although in practice the latter have received limited attention.

Thus, through its overall industrial development roadmap, the Micro and Small Enterprises Development Strategy and medium‑term GTP, the Government of Ethiopia has focused on micro and small businesses as tools for job creation in the short term, and as engines of economic growth and sources of developmental investors in the medium and long term.

Review of other countries’ experiences In Latin America (Brazil), East Africa (Kenya and Tanzania), North Africa (Algeria) and Asia (China), sisal production provides individuals, mainly women, with their livelihoods. In both developed and developing countries, animal‑drawn carts, small retail outlets, small food catering outlets, and agro‑processing are micro and small businesses that are integral to economies.

In developing countries like Ethiopia, micro and small enterprises play an important role both as contributors to the GDP and as creators of self‑employment opportunities. Small businesses, in particular those in the manufacturing sector, are also expected to play a crucial role in economic transformation from agrarian and service‑based economies to ones dominated by manufacturing. Studies show that micro and small enterprises account for about 80 percent of self‑employment in the formal sector in low‑income countries (Ayyagari et al 2011). Other studies show that if one considers micro, small and medium enterprises, these can make up 90 percent of all workers in developing countries. What is more, reports show that “small firms in Africa appear to create a disproportionate share of new jobs. In the median African country, about 47 percent of new jobs were created in firms with 5‑19 workers” (Page and Söderbom 2012). In addition, these firms are, most often, owned and managed by youth and women, and are the source of livelihood for a large proportion of urban youth and women—the economically marginalized groups in developing countries. For instance, in Ethiopia, about 30 percent of all micro and small businesses are owned by women (Kipnis 2013), which implies that the development of micro and small businesses also plays an important role in the economic empowerment of women and youth.

17 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 4. IDENTIFICATION AND SELECTION OF OFF‑FARM ACTIVITIES

As explained above, the aims of the study were defining the scope in terms of selected off‑farm activities, conducting a market assessment and building a strategy.

4.1. Identification of Off‑farm Activities The study team first identified existing off‑farm activities or businesses based on participatory survey methods; that is, in consultation with local communities (youth, men and women), local government and nongovernmental organizations, and elders and religious leaders. The off‑farm activities identified were mainly those currently practiced by the local communities to differing degrees from location to location.

Local communities identified several off‑farm activities, including natural resource extraction (sand, stones, etc.); livestock fattening; petty trading in livestock and livestock products; poultry production; beekeeping; trade in grain and vegetables; retail shops; food catering; hairdressing; animal‑drawn carts; construction; woodwork and metalwork (as well as traditional metalwork); bakeries; embroidery; pottery; weaving; and sisal rope production. In most activities—such as petty trading in livestock and livestock products, livestock fattening, poultry production, beekeeping, grain and vegetable trade, retail shops, food catering and hairdressing—the participation of women was high.

4.2. Selection of Off‑farm Activities After making a complete survey of off‑farm businesses in the target woredas, the study team presented a list of activities to specialists who participated in the prioritization workshop organized by CRS. The experts debated each off‑farm activity based on some defined criteria. The general principle was that activities for value chain development interventions should be selected based on their respective contribution to defined broader indicators. Based on the CRS Value Chain Toolkit, the selection criteria were divided into two: the impact‑level criteria that made up 50 percent of the total weighting, and the feasibility criteria, which took the remaining 50 percent. There were nine impact criteria and ten feasibility criteria (see Tables 4 and 5). CRS emphasized that agriculture‑related off‑farm activities should be excluded from further study, perhaps to avoid overlapping with the efforts of the other studies and partly due to “off‑farm” definition.

18 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Table 4: Weighting of criteria for off‑farm activities selection Impact criteria Weight (%) Feasibility criteria Weight (%) Food security (contribution to livelihoods) 15 Presence of CRS in the area 5 Market/profit potential 20 Market demand 20 Climate resilience 10 Smallholder friendly 10 Influence (on policies, industry, private 10 Upgrading potential 10 sector, etc.) Creates job opportunities 10 Strong implementing partners 10 Youth friendly 10 Existence of producers’ group 10 Gender/women friendly 5 CRS staff knowledge 5 Environment friendly 10 Value chain services in the area 10 Scalable 10 Enabling environmental 10 Donor interest 10

Using these criteria and excluding agriculture‑related off‑farm activities, the experts ranked the activities in each woreda and selected the best three in each. The selected activities included food catering shops, small retail shops, animal‑drawn carts, bakeries, agro‑processing (baltina), weaving, construction; sisal rope production, woodwork. The study team and local communities then identified hairdressing (Boset and Dodota) as an important activity (see Table 5).

Table 5: Selected off‑farm activities, by woreda

Woreda Selected off‑farm activities Dire Dawa Weaving Retail shop Hairdressing Babile Construction Food catering shop Retail shop Deder Retail shop Woodwork Construction, weaving Malka Balo Woodwork Bakery Weaving Midega Tola Sisal rope production Weaving Retail shop Boset Baltina agro-processing Food catering Retail shop, hairdressing Dodota Animal‑drawn cart Retail shop Food catering shop, hairdressing Sire Hairdressing Retail shop Food catering shop Ziway Dugda Animal‑drawn cart Retail shop Food catering shop ATJK Animal‑drawn cart Retail shop Food catering shop Arsi Negele Animal‑drawn cart Retail shop Food catering shop Heben Arsi Animal‑drawn cart Retail shop Food catering shop Shala Baltina agro-processing Retail shop Food catering shop Siraro Baltina agro-processing Retail shop Food catering shop

19 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 4.3. Gender Dimension of Off‑farm Activities The selected off‑farm activities were viewed through a gender lens. While there was strong participation in the activities among both male and female youth, there appeared to be clear female/male demarcations in the choice of activity. Only young men operated businesses such as woodwork, donkey/horse‑drawn carts, bakeries and weaving. Similarly, only young women operated businesses in baltina agro-processing and sisal rope production. In all other off‑farm activities, there was a mix of both sexes. Based on the KII and FGD results, a close analysis of power relations in decision‑making and benefit share between male and female operators showed no significant difference.

Table 6: Priority off‑farm activities, by gender

Females M & F Commodities Males (W & G) (groups) Food catering shops ‑ W & G Y & W Retail shops Y W & G Y & W Baltina agro-processing ‑ W & G ‑ Woodwork A & Y ‑ ‑ Construction A & Y ‑ ‑ Animal-drawn carts Y ‑ ‑ Hairdressing Y W &G ‑ Sisal rope production ‑ W &G ‑ Bakeries A & Y ‑ ‑ Weaving A ‑ ‑ Note: Y = Youth | A = Adult | W = Women | G = Girls | M = Male | F = Female

20 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5. VALUE CHAIN AND MARKET SYSTEMS ANALYSES OF SELECTED OFF‑FARM ACTIVITIES

This section provides detailed value chain and marketing systems analyses of the selected off‑farm activities in the 14 target woredas in terms of their cost, revenue, gross profit and gross margin. For each small business, opportunities and challenges were identified and strategic intervention areas proposed. Because of the nature of the activities and common characteristics of the socioeconomic circumstances, most off‑farm value chains shared common opportunities and challenges, and hence similar strategic interventions were recommended.

5.1. Value chain and market systems analysis of food catering shops

5.1.1. Market actors and consumers It was found that mainly women and girls owned small food catering shops in small towns, peri‑urban kebeles and villages. But some were owned by groups of youth (male and female) organized by the woreda office of the Federal Urban Job Creation and Food Security Agency (formerly known as the Federal Micro and Small Enterprise Development Agency). In these cases, the youth were from marginalized groups with no land for crop production, or depended on their families.

The food catering businesses can be divided into two broad categories: subsistence and entrepreneurial. The former are run to support families, without much concern for profitability or the future of the businesses. These were run mainly by uneducated adult women from low‑income families. The entrepreneurs were, on the other hand, educated youth (both male and female), in towns and peri‑urban areas, who were profit‑oriented and hence tried to expand their businesses. Nevertheless, neither category had formal training in food preparation or hygiene. Their efforts were based on personal experience preparing food in traditional ways.

In peri‑urban areas and villages, the food catering businesses were operated mainly by women and girls. For instance, in Alam Bada rural town in Heben Arsi, a housewife and her younger sister operated a small food catering shop. In some cases, families (husbands and wives) were organized into groups of 5 to 10 individuals operating their business together. Some were organized into groups to get support (mainly credit) from Oromia Credit and Savings Share Company, after the Federal Urban Job Creation and Food Security Agency office had helped them prepare business plans to access the loans.

In small food catering shops, men are mostly responsible for selling soft drinks and bottled water, collecting water and serving customers, while the women prepare the food in the kitchen and buy inputs such as grain, vegetables, cooking oil and spices, from markets and retail shops.

In the relatively larger towns, there were hired laborers (mostly uneducated migrant girls) working in food catering shops as cooks, preparing coffee and baking injera. According to the operators of small food shops in peri‑urban and urban areas, there was a shortage of casual laborers, as migrants preferred to work in construction at a better hourly rate.

21 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Results from the KIIs indicated that the number of individuals preparing and selling food had been increasing over the last 5 years, mainly due to increasing demand for prepared food, owing to increased urbanization and growing income levels. On average, about 5 to 10 small food catering shops existed per kebele in the visited woredas, although this varied from woreda to woreda, and from peri‑urban to rural areas. Much of the growth was observed in suburban kebeles and in those with high population densities, as well as rural villages that were rapidly transforming into urban‑like settlements.

Some of the foodstuffs prepared and sold included beyanet (injera flatbread with a variety of sauces), tibs (roasted oxen, goat/mutton) and boiled potatoes with chili, boiled maize and beans, bread (from bakery) with tea, homemade sambusa (samosa) and biscuits. In areas that were largely Christian, locally made alcoholic drinks like tella and arake (locally produced fermented drinks) were supplied, particularly in highland woredas with urban centers such as Arsi Negele and Heben Arsi. Traditional alcoholic drinks from Arsi Negele were traded to cities and towns in the south, east and central highlands of the country, including the capital city of Addis Ababa.

Figure 2: Injera served in Dole village, Arsi Negele.

The number of consumers in small towns, peri‑urban areas and villages is increasing due to rural‑to‑urban migration, and the expansion of government centers like schools, TVET institutions, farmer training centers, health centers, etc. Workers in these government institutions increase demand for prepared food and other consumer goods. There are also various construction projects (government and private) and private investments that have attracted daily laborers that patronize the small food catering shops. Towns and larger villages also have at least two market days per week, which attract farmers from other kebeles, adjacent woredas and larger towns. Market participants are key customers of food catering shops in villages and small towns. In short, there is an agglomeration of towns and villages that have created business centers that attract individual businesses run mainly by youth from rural areas. Youth also migrate to urban centers due to a lack of land. Thus, the customers of small food catering shops in small towns and villages include daily laborers (mainly migrants), government employees (agricultural extension workers, health extension workers, teachers, etc.), farmers from rural areas during market days, local inhabitants, commuters, etc. This indicates that there is no specific segment of society that patronizes food catering outlets.

22 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS But there appears to be seasonal fluctuation in the number of customers, as farmers visit towns less frequently outside of harvesting time (November to January) due to a depleted stock of grain to be marketed.

5.1.2. Input suppliers Small food catering outlets have three major inputs: raw materials, labor (both hired and own) and capital. Raw materials are required to make injera, sauces of various kinds, sambusa and homemade biscuits, nifro (boiled beans and maize in water) and boiled potatoes, which are served with chili, mainly in the evening. Owners of food catering outlets buy the inputs from various sources. During harvest time, they buy grain and vegetables from both farmers and traders, while during slack times they buy from traders in woreda towns who have stored grain. Consumer goods like salt, cooking oil, sugar and spices are bought from retail shops. According to the key informants, most ingredients were bought from large towns once or twice a week on market days.

Generally, the capital requirement for investment in food catering was relatively low as they were owned and operated by resource‑poor female‑headed households and youth. The capital included physical infrastructure, storage containers, and pots, plates and utensils for preparing and serving food. In most visited woredas, typical food catering businesses were found to own the following capital inputs: traditional frying pan/stove, storage containers, pots, dining plates and cups, tables and chairs, and shelves. Tea houses invested in tape recorders to attract customers. The initial investment costs varied by location within woredas (towns, peri‑urban areas and rural villages); as we moved from towns to rural areas, capital investment became smaller. The capital investment costs also differed across surveyed woredas, with higher investment costs (and hence larger businesses) in woredas along major roads and those with larger towns like ATJK, Arsi Negele, Ziway Dugda, and Dodota. Total capital investment ranged from about 3,750 Birr in Arsi Negele to 22,025 Birr in Dodota (see Figure 4). The variation in start‑up capital depended on the size of the business. Thus, for most new and resource‑poor entrants, capital was a critical challenge. In many cases, however, food catering businesses could be started with minimal household utensils, and gradually grown into larger businesses. In most cases, food catering operators had started their businesses with their own savings or with money borrowed or given by families or relatives.

23 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 25000 Figure 3: Average initial investment cost for food catering (in Birr), by woreda

22,025

20000 20,000

15000 15,600 14,806

10000 10,500

7,000 6,210 5000 5,270 5,260 4,500 3,750

0 Dodota Sire Boset Ziway ATJK Heben Arsi Siraro Shala Dire Babile Dugda Arsi Negele Dawa

5.1.3. Value chain map In all the visited woredas with food catering outlets, there was a short value chain with minimal value additions. For instance, the operators bought teff (grain staple) from traders and/or farmers, ground it, prepared injera and served it with sauce to their customers. The sauces were made at home from pulses, vegetables, spices and cooking oil. Other food items, like homemade bread, biscuits and sambusa, were also made from ready‑processed wheat flour. Most of the business owners processed commodities from raw crops, vegetables and spices. However, there were some inputs (like fine pepper powder, mixin shiro, bean/pea powders), bought directly from retail shops.

Figure 4: Value chain for food catering shops

SUPPLIERS FOOD CATERING SHOPS Farmers

MAJOR INPUTS CONSUMERS Traders Grain, vegetables, spices, Daily laborers (mainly migrants) cooking oil, consumer goods, Government employees labor and capital Farmers on market days Retailers Local residents OPERATORS Commuters Youth (M & F) and women • Beyanet (injera with a variety of sauces) • Tibs: roasted goat/sheep • Boiled potato with chilli • Boiled maize and beans • Bread and tea • Sambusa and biscuits • Local beverages (alcoholic and non-alcoholic)

24 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.1.4. Running costs As explained above, food catering businesses in small towns, peri‑urban areas and villages use three main inputs: raw materials (grain, vegetables, processed food items, sugar, cooking oil, pulses); labor, including the opportunity cost of owners/operators; and other inputs like transportation services, rent or opportunity cost of rent, water, milling services and electricity. The average total operating costs of food catering varied with the size and type of business, with monthly operating costs ranging from about 15,000 Birr in ATJK and Siraro to about 10,000 Birr in Dodota, indicating small variations in operating costs between businesses of similar size and offering the same types of food. Labor costs were mainly in urban centers like Dire Dawa (see Table 7).

Table 7: Average monthly running costs of food catering shop (in Birr)

Others Labor Woreda Raw materials (rent, transportation, Total (incl. opportunity cost) water, milling) Dodota 6,243.15 3,000.00 750.00 9,993.15 Sire 9,128.00 3,600.00 680.00 13,408.00 Boset 8,740.00 3,440.00 580.00 12,760.00 Ziway Dugda 10,500.00 3,000.00 850.00 14,350.00 ATJK 10,552.50 4,200.00 540.00 15,292.50 Heben Arsi 9,315.00 3,503.00 572.00 13,390.00 Arsi Negele 7,526.00 2,260.00 640.00 10,426.00 Siraro 9,022.86 5,600.00 740.00 15,362.86 Shala 7,834.00 3,500.00 760.00 12,094.00 Dire Dawa 8,573.75 4,860.00 800.50 14,234.25 Babile 7,328.80 3,544.60 762.40 11,635.8 0 Source: Based on FGDs and KIIs

The purchase of ingredients made up most of the operating cost. Ingredients made up the highest share of average total monthly costs in Ziway Dugda (73 percent) followed by Arsi Negele (72 percent), while the lowest was reported in Siraro (59 percent). Labor costs made up 37 percent of total operating costs in Siraro, followed by Dire Dawa at 34 percent. Other costs—such as rent, transportation, milling and water—constituted 7.5 percent of total monthly operating costs in Dodota, followed by 6.6 percent in Babile. In general, other operating costs made up less than 10 percent of total monthly operating costs (see Figure 6).

25 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Figure 5: Percentage share of major input costs in total costs of food catering shop

120 Raw materials Labor (including opportunity cost) Other (including rent, transportation, water, milling, etc.)

100 7.5 5.1 4.5 5.9 3.5 4.3 6.1 4.8 6.3 5.6 6.6

30 26.8 27 20.9 27.5 26.2 21.7 36.5 28.9 34.1 30.5 80

62.5 68.1 68.5 73.2 69 69.5 72.2 58.7 64.8 60.2 63

0 Dodota Sire Boset Ziway ATJK Heben Arsi Siraro Shala Dire Babile Dugda Arsi Negele Dawa

5.1.5. Revenue, gross profit and gross margin For all food catering businesses in the 11 woredas, the average monthly revenue was greater than 10,000 Birr, with the highest monthly revenue reported in ATJK (19,210 Birr), which generated gross profit of 3,917.76 Birr per month, and a gross margin of 20.4 percent, indicating that food catering is a stable business in ATJK. The second‑highest monthly revenue was reported in Siraro (18,876 Birr), which resulted in a monthly gross profit of 3,513 Birr and a gross margin of 18.6 percent. The third‑highest average monthly revenue was found in Dire Dawa city, at 17,922 Birr, and a gross margin of 20.6 percent. The lowest average monthly revenue was in Arsi Negele (12,616 Birr) resulting in the lowest gross margin of about 17 percent, indicating that food catering was less profitable there (see Table 8). In conclusion, the gross margin for food catering is moderately high. Operators earned a full wage equivalent (considered as opportunity cost) and were still able to generate a further sizable monthly income ranging from 2,190 Birr in Arsi Negele to 3,917 Birr in ATJK. According to the information from FGDs and KIIs, sales volume and revenue from food catering fluctuated according to agricultural seasons, with a higher demand for food during harvest seasons.

Table 8: Average monthly costs, revenue, gross profit and gross margin of food catering shops, by woreda

Woreda Cost Revenue Gross profit Gross margin

Dodota 9,993.15 12,720.00 2,726.85 21.4 Sire 13,408.00 16,724.00 3,316.00 19.8 Boset 12,760.00 15,520.00 2,760.00 17.8 Ziway Dugda 14,350.00 17,800.00 3,450.00 19.4 ATJK 15,292.50 19,210.26 3,917.76 20.4 Heben Arsi 13,390.00 16,952.00 3,562.00 21.0 Arsi Negele 10,426.00 12,616.00 2,190.00 17.4 Siraro 15,362.86 18,876.00 3,513.14 18.6 Shala 12,094.00 15,020.00 2,926.00 19.5 Dire Dawa 14,234.25 17,922.00 3,687.75 20.6 Babile 11,635.8 0 14,258.80 2,623.00 18.4 Source: Based on FGDs and KIIs 26 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.1.6. Opportunities and challenges As food catering is largely done by women and girls, the opportunities and challenges here also refer to those segments of the community.

Opportunities • Existence of government institutions At the grassroots level, there are several government institutions—such as Women’s Affairs, Urban Job Creation and Food Security, TVET institutions, farmer training centers, etc—that can provide technical support (training, auditing services, credit access by helping operators prepare business plans, facilitating premises, market linkages, etc.). This support enhances the growth and promotion of off‑farm activities. • Increased urbanization Owing to the expansion of government centers, rural‑to‑urban migration and the clustering of villages, the urban population has been increasing, which boosts demand for processed agricultural outputs and cooked food. • Income growth In rural, peri‑urban and urban areas, there have been significant increases in income (mainly that of daily laborers and farmers), which has resulted in growth in demand for prepared food. • Cultural and behavioral changes In recent years, both the rural and urban population, mainly youth, have started buying prepared foods from food catering shops. Rural people (male and female farmers) have also developed a culture of buying and using ready‑made foods from food catering shops, particularly on market days. This is a good opportunity for youth and women in food catering businesses.

Challenges • Lack of skills and knowledge In most cases, operators had received no training in food preparation, hygiene, food safety or sanitation. They also lacked financial literacy and entrepreneurship skills. Most operators—particularly private businesses—had had no training in market development, customer care, recording keeping, etc. • Lack of premises A lack of suitable premises, or the expense of renting premises, discourages many youths from entering the business. This affects the scale and profits of the operations, and also contributes to sanitation and hygiene problems. Many small food catering outlets prepare and sell food in the open air, where it is exposed to direct sunlight, dust, flies and germs. Thus, food catering in rural areas has serious sanitation and hygiene problems. • Lack of access to credit Information from FGDs showed that, due to lack of appropriate collateral, there was limited credit from formal financial institutions to expand the businesses by, for example, adding more seating or more food varieties. Consequently, most small and micro business operators depended on their own capital to start and run their businesses. These challenges were common to youth (male and female) and adult women, as they had no or few fixed assets to pledge as collateral. • High income tax Most respondents of FGDs, mainly in towns, complained of high taxes levied on them. Business operators said income tax was not in line with their annual income as tax was paid from working capital not from income, and hence reduced their working capital and killed incentives for expansion and engagement. In rural areas, the operators paid no tax due to the small scale of their businesses. • Input‑related challenges There were two key problems related to inputs. First, the input prices had been increasing, which negatively affected profit. When the prices of vegetables regularly spike, food catering outlets cannot change their prices without deterring customers.

27 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Similarly, there are seasonal fluctuations in the price of teff and maize, with prices increasing during the rainy season due to supply constraints. Second, there are critical shortages of some inputs like cooking oil and sugar. The problem is more challenging during drought. Negative shocks to the agricultural sector affect small food catering businesses in two ways: by reducing the supply of raw materials (grain, pulses, vegetables, etc.), and by reducing the income of farmers and hence their disposable income available to buy ready‑made foods.

5.1.7. Strategic interventions • Provide technical skills training Offer skills training in modern food preparation methods. Experience shows that there are fast, efficient ways of cooking quality food of different varieties from local ingredients. The training should also include hygiene, sanitation, and food safety, and should be available to all women, girls and men, regardless of their education levels. • Provide financial literacy training Provide training on the basics of keeping financial records (expenses and revenue). As many of the businesses are run by youth who have completed elementary or high school, the building blocks are in place for the basics of financial literacy. • Develop/provide entrepreneurship skills Market development, customer service, competitor analysis and quality control are also areas of support that could be offered to business people. • Facilitate credit provision As collateral is a required precondition for loans from most formal financial institutions, it would be more promising to link businesses with microfinance institutions (MFI) and savings and credit cooperatives (SACCOs). The best practice, however, would be to establish livelihoods groups that could internally mobilize their savings and use these for internal credit. • Improve access to premises Lobbying local government to provide space in appropriate locations (e.g., market areas) is critical. The poor cannot afford to buy or rent premises. The availability of premises enables the image of the business to be built up, helps operators meet minimum sanitation and hygiene standards, and creates opportunities to increase the scale of the operations to maximize profits. • Improve supply and consistent flow of raw materials Establish strong market linkages and access to credit to enable businesses to buy stock in bulk.

28 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.2. Value Chain and Market Systems Analysis of Retail Shops

5.2.1. Market actors and consumers Retail shops are one of the petty trades often carried out on a small scale in small villages and in rural areas. Running a small retail shop is attractive to youth and women due to the moderate start‑up capital needed, minimum land requirement (5 or 6 square meters), and immediate returns. Retail shops are owned and operated by family members employing one to two individuals. In the study areas, the owners of these shops were youth and women who had meager initial capital with which to commence. The youth were mostly educated, but had no access to land for agricultural production. They operated shops on land they had obtained from their families. This implies that rented shops were limited in rural areas. The shops were constructed from locally available materials and had iron roofs.

According to information from the woreda and kebele administrations and local communities visited, the number of retail shops has been increasing over the last 5 years, perhaps due to increased urbanization, and hence the market was approaching saturation point in the study villages. In small towns, peri‑urban areas and villages, there were several retail shops supplying various consumer goods to the rural population. These were concentrated around schools, FTCs, health centers, market places and large villages, and along major roads.

As reported by the key informants and FGDs, the retail shops supplied, at reasonable prices, goods required by rural communities to meet their immediate needs. The main customers of these shops were rural inhabitants. According to the key informants and the observations of the consulting team, as one moved from larger towns deep into the rural areas, the size and number of retail shops and the variety of goods they sold declined. That is, the further the shop was from the woreda capital, the fewer the types and the lower the volume of goods it sold. Yet, a typical rural retail shop contained at least 15 different consumer goods.

5.2.2. Input suppliers Shopkeepers buy retail goods directly from wholesalers and/or from larger retail shops. Goods traded in retail shops included such items as salt, sugar, cooking oil, candy and chewing gum, soft drinks and bottled water, various manufactured biscuits, macaroni and spaghetti, wheat flour, coffee, cosmetics, detergents, stationery (exercise books and pens), torches, batteries, kerosene, candles, cigarettes and matches.

To commence retail businesses, owners needed to have some capital to buy consumer goods. Most raised their own initial and working capital. The start‑up capital was generally small and affordable to many households and community groups. Working capital usually came from other traders, relatives or friends, from agriculture or other trades (livestock and grain), or from international migration (returnees). None of the interviewed actors had started their businesses with a loan from a formal financial institution, pointing to one of the challenges facing those hoping to set up a shop. The major investment items were shelving, scales (for weighing), storage containers, premises and working capital.

The capital investment required differed across surveyed woredas, with higher investment costs (and hence larger businesses) in woreda towns like ATJK, Boset, Arsi Negele, Babile, Dire Dawa, Ziway Dugda and Dodota. The initial investment cost varied by location within woredas (peri‑urban and rural villages). As one moved from towns into the rural areas, the capital investment became smaller. The average capital investment ranged from about 4,000 Birr in Shala and 10,500 Birr in

29 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Dire Dawa city to 12,850 Birr in Dodota (see Figure 7). Many reported that the working capital required was increasing due to inflation. Thus, for many of the shops, a shortage of working capital was still a challenge. On average, a village shop bought consumer goods valued at 3,000 to 7,000 Birr per week, depending on the size of the business, its location and other factors.

As in the case of food catering, supply shortages of some important raw materials, such as sugar and cooking oil, were critical and reduced revenue and profit.

15,000 Figure 6: Average initial capital of retail shops, by woreda (in Birr)

12,000 12,850

10,700 10,500 9,000 10,000 9,250 9,000 8,600

6,000 6,500 5,600 5,000 5,000 4,500 3,000 4,000

0 Dodota Sire Boset Ziway ATJK Heben Arsi Siraro Shala Dire Babile Deder Midega Dugda Arsi Negele Dawa Tola

5.2.3. Value chain Distributors in zonal and woreda towns like Adama, Arsi Negele, Dire Dawa, Harar, Shashamane and Ziway supply consumer goods to traders in woreda administrative towns. Retailers in rural areas mostly buy goods from woreda traders (but sometimes from zones) and retail these goods in their shops to rural consumers. For example, retail shops in the small towns and rural areas of ATJK bought goods from Ziway town, those in Heben Arsi and Arsi Negele from Arsi Negele town, and those in Boset from Adama town. For some commodities, such as cooking oil and sugar, business owners travelled to large towns such as Adama, Dire Dawa, Hara, Shashamane and other zonal capitals.

Figure 7: Value chain for retail shops

SUPPLIERS RETAIL SHOP

Wholesalers

Transport service providers Major consumer goods: OPERATORS Sugar, coffee, candy, biscuits, CUSTOMERS Woreda traders Youth (M & F) cosmetics, detergents, Children, pregnant women, either individually soft drinks, bottled water, elderly people, students, farmers, or organized in chewing gum, stationery agricultural extension workers, groups (exercise books and pens), teachers, commuters, other groups macaroni and spaghetti, etc.

30 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS In the value chain, there are actors who transport goods (in small trucks, on motorbikes, on public transport, etc.) from woreda centers to the rural areas. The transport options are sometimes unsuitable for conveying large quantities of goods and sometimes risky (e.g. motorbikes) when transporting goods and people.

5.2.4. Running costs The major business costs for village shops are made up of inputs (merchandise purchases), transportation, labor (including opportunity cost), and working space (rent or opportunity cost). For ease of estimation, these costs were first down‑scaled to weeks and then converted to months based on the turnover of commodities bought (the period needed to sell out all commodities purchased at the same time). The average costs were a function of the size of the business and the diversity of commodities bought and sold. On average, however, the average monthly operating costs varied from about 5,400 Birr in Dodota, and more than 16,000 Birr in Dire Dawa city and Heben Arsi, to over 18,000 Birr in Siraro (see Table 9).

Table 9: Running costs of retail shops, by woreda (in Birr)

Woreda Raw Labor (including Others (house rent, Total cost materials opportunity cost) transportation)

Dodota 4,268 800 300 5,368 Sire 8,398 1,000 450 9,848 Boset 8,685 1,200 350 10,235 Ziway Dugda 12,450 1,000 350 13,800

ATJK 12,500 1,000 500 14,000 Heben Arsi 15,000 1,200 350 16,550 Arsi Negele 9,000 1,300 350 10,650 Siraro 16,000 1,400 650 18,050 Shala 8,000 1,250 400 9,650 Dire Dawa 14,000 1,500 600 16,100 Babile 8,500 1,000 350 9,850 Deder 7,800 850 300 8,950 Midega Tola 7,500 820 320 8,640 Source: Based on FGDs and KIIs

Of the total monthly operating cost, most was made up of input costs (purchase of merchandise), and the share varied from woreda to woreda. According to information gathered from FGDs and KIIs, the share of merchandise in the total average monthly costs was as high as 91 percent in Heben Arsi followed by 90 percent in Ziway Dugda, 89 percent in ATJK and Siraro, and 87 percent in Dire Dawa city and Midega Tola. The lowest share of input cost, 79 percent, was reported in Dodota. Labor costs (including opportunity cost) accounted for less than 15 percent of the total monthly operating costs. Other costs, such as rent and transportation, were insignificant (less than 3 to 6 percent) compared to the input costs (see Figure 9).

31 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Figure 8: Distribution of operating costs of retail shops, by woreda (%)

Raw materials Labor (including OC) Other (including rent, transportation, etc.) 120

5.6 4.6 3.4 2.5 3.6 2.1 3.3 3.6 4.1 3.7 3.6 3.4 3.7 100 7.2 7.1 7.3 7.8 9.3 10.2 9.5 9.5 10.2 11.7 12.2 13 14.9 80

79.51 85.28 84.86 90.22 89.29 90.63 84.51 88.64 82.9 86.96 86.29 87.15 86.81

0 Dodota Sire Boset Ziway ATJK Heben Arsi Siraro Shala Dire Babile Deder Midega Dugda Arsi Negele Dawa Tola

5.2.5. Revenue, gross profit and gross margin In all the target woredas with retail shops, the average monthly revenue varied from as low as 5,840 Birr in Dodota to as high as 19,300 Birr in Siraro. In all woredas, average gross profit per month was less than 1,500 Birr, indicating a weekly gross profit of about 375 Birr. The highest average monthly gross profit was reported in Babile at 1,310 Birr, followed by Siraro at 1,250 Birr, and Dire Dawa city at 1,180 Birr. The lowest average monthly gross profit was reported in Dodota (472 Birr) and the second‑lowest in Shala (670 Birr). Gross margin is a measure of the stability and profitability of a business. A ratio of less than 20 percent indicates that the business is not sustainable. Thus, since the ratio was far below 20 percent, the retail shop business in all the visited woredas was deemed unsustainable (see Table 10).

Table 10: Average monthly costs, revenue, profit and gross margin of retail shops, by woreda

Costs Revenue Gross profit Gross margin Woreda (birr) (birr) (birr) (%) Dodota 5,367.72 5,840.52 472.80 8.10 Sire 9,848.00 10,560.00 712.00 6.74 Boset 10,234.96 11,051.20 816.24 7.39 Ziway Dugda 13,803.36 14,876.24 1,072.88 7.21 ATJK 14,000.00 15,150.00 1,150.00 7.59 Heben Arsi 16,550.00 17,630.00 1,080.00 6.13

Arsi Negele 10,650.00 11,500.00 850.00 7.39

Siraro 18,050.00 19,300.00 1,250.00 6.48 Shala 9,650.00 10,320.00 670.00 6.49 Dire Dawa 16,100.00 17,280.00 1,180.00 6.83 Babile 9,850.00 11,160.0 0 1,310.00 11.74 Deder 8,950.00 9,450.00 500.00 5.29 Midega Tola 8,640.00 9,440.00 800.00 8.47 Source: Based on FGDs and KIIs

32 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Average price markup per unit was highest for coffee at 10 Birr per kilogram, followed by sugar at about 8 Birr per kilogram. The average markup for 2 liters of water was 3.75 Birr, and about 2 Birr per kilogram of wheat flour. For about half of surveyed consumer goods in a shop, the average markup was 1 Birr per kilogram or unit (see Figure 10). Thus the average markup for most consumer goods in retail shops is small, and owners do not know how much they earn per commodity.

Figure 9: Average price margin of retail goods per unit (per kg or per piece)

Coffee Sugar Water 2L Flour Soft drink Water 1L Pasta Macaroni Soap Biscuits Salt Cigarettes Candy Plastic bags Chewing gum

0 2 4 6 8 10

5.2.6. Opportunities and challenges

Opportunities • Increased urbanization Owing to the expansion of government centers, rural‑to‑urban migration and the clustering of villages, the urban population is increasing, boosting demand for consumer goods. • Income growth In rural and small towns, incomes—mainly those of daily laborers and farmers—have been increasing, resulting in a greater demand for consumer goods. • Substitution of traditional commodities for modern ones In recent years, the availability of livestock products such as butter has been limited, and hence local communities have used more cooking oil. Similarly, soft drinks are now common in rural areas. Traditional handmade utensils are being replaced by modern plastic and steel utensils, cooking pots and dining plates. These changes create opportunities for expansion of retail shops in rural areas. Challenges • Fluctuating and increasing prices and critical shortages of consumer goods Prices of consumer goods fluctuate and sometimes spike. Moreover, there are critical shortages of consumer goods such as sugar and oil. If such a trend continues, it will restrict demand and turnover, and hence the profit of these businesses. • Inadequate knowledge and skills In rural areas, small business owners lack basic entrepreneurial skills, such as financial record-keeping, customer service and market development.

33 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS • Inadequate initial and working capital Due to inadequate access to credit services, ascribed to a lack of collateral, women and youth have limited opportunities to enter and/or expand businesses to enjoy economies of scale. • Limited government attention The GoE has focused on manufacturing, construction and urban agriculture, but has not included off‑farm activities such as retail shops as part of the country’s industrialization strategy.

5.2.7. Strategic interventions • Provide financial management training Provide women and youth with training in financial literacy, record-keeping (expenses and revenue) and management. • Develop/provide entrepreneurship skills and Kaizen (continuous incremental improvement) These include customer care, food safety, merchandizing, competitor analysis, etc. • Provide credit Participating women and youth (male and female) should be linked to formal and informal financial institutions in an innovative manner to get credit for start‑up and working capital. • Establish and strengthen market linkages with consumer cooperatives to improve price stability and the flow of consumer goods.

34 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.3. Value Chain and Market Systems Analysis of Baltina Agro-processing In urban and rural settings, there are a number of traditional food processing businesses that add value to raw agricultural products like grain, pulses, spices, livestock products and other crops. However, although woredas in the Rift Valley are rich in vegetables and fruit, there is little meaningful processing of these perishable products. In many cases, farmers in peri‑urban areas process livestock products like cheese and butter and sell them to local consumers. Chili pepper (baltina)6 processing is most popular.

5.3.1. Market actors and consumers Women and girls are the key actors in baltina businesses, often individually and sometimes in groups. There are local value‑addition practices—including preparing mixin shiro (stew of chickpea/bean meal), chili/berbere (spice mixture) and beso (roasted and ground barley)— commonly known as baltina in some target woredas in the Rift Valley like Arsi Negele, Shala, Siraro and Boset. In these woredas, such agro‑processing is done in two ways. The traditional method of preparing chili/berbere involves cleaning the raw pepper, drying and grinding it, then drying it again in the sun (see Figure 11). The dried pepper is then mixed with salt, vegetables and spices (onion, garlic, ginger, fenugreek, black cardamom, cumin, nutmeg) and roasted/dried in a frying pan (mitad). Finally, the mixture is crushed into a fine powder using a pestle and mortar. This is a time‑consuming and labor‑intensive process, and hence it is difficult to commercialize, as regular, large‑scale production is almost impossible. This method is used in the deep rural areas.

Figure 10: Crushed raw pepper dries in the sun (left). Women retail baltina in a local market in Aje town. A semi‑modern method is used in urban and peri‑urban areas. Women buy the raw pepper and clean it manually. They dry it in the sun and crush it into smaller pieces using a pestle and mortar, then again dry it in the sun. Finally, they mix the dried pepper with spices and salt, dry the mixture using a frying pan, and then take it to an electric milling house in an urban center, where it is ground into a fine powder.

During the FGDs, many community members indicated the potential of baltina businesses for generating income, ensuring food security and improving livelihoods resilience. It is also environmentally friendly, with no harm to the natural or social environment. Agro‑processing also adds value and quality to raw products and hence improves demand and linkages with market outlets such as hotels, hospitals and large establishments such as colleges and universities. The baltina products can also be exported and generate significant foreign exchange.

6. Baltina is the common name for semi‑processed food items, mainly hot chili, and other spice products.

35 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.3.2. Input suppliers Community farmers are the primary suppliers of the agricultural raw materials for baltina agro‑processing (peppers, barley, spices). The processors also buy many of the ingredients from local traders. Processing of baltina is largely done manually by the operators themselves.

In the study areas, the operators raised their own capital. In rural areas, the capital investment for pepper processing includes a frying pan, pestle and mortar, various sizes of plates, spoons/large forks, plastic bags, plastic sheet/canvas and storage containers. In urban centers, some additional materials like scales (for weighing), shelves and counters were required for processing and selling peppers. The investment for fixed assets ranged from 1,500 Birr in Siraro to 3,500 Birr in Boset. However, most women processing and selling pepper had no equipment like scales, shelves or counters as they simply sold their products in the market during market days and sometimes sold to local cafes and restaurants.

The total capital investment for pepper processing and marketing was small with the highest reported in Boset at 8,500 Birr, while the lowest was about 4,500 Birr in Shala (see Figure 12).

Figure 11: Level of start‑up capital for baltina, by woreda (in Birr) 10,000

8,000 8,500

6,000 7,500

4,000 5,000 4,500

2,000

0 Boset Arsi Negele Shala Siraro

5.3.3. Value chain In woredas considered to have potential for baltina business, the value chain was short, with some value additions. For instance, hot chili processors in Siraro bought raw pepper mainly from traders and sometimes from farmers/producers, processed and sold it as fine pepper powder to their customers, mostly local farmers, on market days in Aje (Shala), Senbate (Siraro) and other local markets. Similarly, in Boset, mixin shiro and beso were processed by local processors (mainly women), who bought the raw inputs from traders and producers/farmers. Most of the operators processed raw grains, pepper and spices. However, there were some inputs (like salt and other spices) that were bought directly from retail shops.

However, the baltina business was limited to a few households and some kebeles due to inherited experience in preparing the products. Moreover, the production was on a small scale due to a lack of working capital. Thus, major customers are farmers, mainly on market days (see Figure 13), and local hotels. There were no traders who bought items from local markets and then sold them on to larger urban markets.

36 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Figure 12: Value chain for baltina agro-processing

BALTINA PROCESSORS SUPPLIERS AND SELLERS Farmers/ producers

Service providers (Transportation/milling)

Traders Major locally OPERATORS processed products: CONSUMERS Girls and women Mixin shiro (pepper with Farmers mainly on market days, MAJOR INPUTS in rural and beans), hot chilli/berbere and urban dwellers, Raw peppers, spices, barley, peri-urban areas beso (roasted and ground food catering shops beans/peas, salt, etc on market days barley with spices)

5.3.4. Running costs For preparing and selling baltina, the major inputs are raw peppers, spices, labor and related services like transportation and milling houses to grind the pepper. In some areas, like Boset, operators produced other products like mixin shiro and beso. Thus, the input costs varied depending on the number and diversity of products processed and marketed. On average, the baltina business (berbere, beso, mixin shiro and aximit) required a working capital of about 4,580 Birr per month in Boset, followed by 4,550 Birr in Siraro. The lowest working capital was reported in Arsi Negele at 2,660 Birr, mainly due to the limited capacity of the business (see Table 11).

Table 11: Major inputs and average monthly costs for baltina agro-processing, by woreda (in Birr)

Woreda Inputs Boset Arsi Negele Shala Siraro Raw peppers 1,200 1,300 2,400 2,800 Spices 550 250 300 400 Barley (beso and aximit) 1,850 NA NA NA Beans/peas (mixin shiro) 260 450 NA NA Labor costs (including OC) 600 580 550 650 Other costs (transportation, milling, 120 80 450 700 plastic bags) Total 4,580 2,660 3,700 4,550 Source: Based on FGDs and KIIs: NA = information not available

In Boset, of the total input costs, about 84.3 percent was attributed to raw materials (pepper, beans/peas, barley and spices). Labor made up only 13.1 percent of the total input costs. Other costs (like milling, transportation, water, etc.) accounted for about 2.6 percent of the total input costs. Similarly, in Siraro, raw materials accounted for 70.3 percent, followed by other costs (transportation, milling, plastic bags), which made up 15.4 percent of total input costs. Labor accounted for 14.3 percent. In Arsi Negele and Shala respectively, raw materials accounted for about 75.2 and 73 percent of total input costs (see Figure 14). Thus, raw materials constituted the largest share of the total input costs in the baltina business, which was also the case for food catering and retail shops in the target woredas.

37 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Figure 13: Distribution (in percent) of input costs for baltina, by woreda 120

2.6 4.5 12.2 15.4

100 13.1 Other (including transportation, milling plastic bags) 20.3 Labor (including OC) 14.9 80 14.3 Raw materials (peppers, beans, barley, spices)

40 84.3 75.2 73 70.3

0 Boset Arsi Negele Shala Siraro

5.3.5. Revenue, gross profit and gross margin In Boset, the average monthly revenue from selling baltina products was about 6,355 Birr per month, which yielded a monthly gross profit of 1,775 Birr. The gross margin was about 28 percent, indicating the baltina business earned about 28 cents on the Birr. In Arsi Negele, the monthly total revenue was about 3,980 Birr, in Shala, 4,800 Birr, and Siraro, 5,500 Birr. The monthly gross profit was 1,300 Birr in Arsi Negele, 1,100 Birr in Shala and 950 Birr in Siraro. The gross margin was 33 percent in Arsi Negele and lowest in Siraro, at about 17 percent of total monthly revenue (see Table 12). The amount of revenue varies seasonally. The dry seasons attract more customers due to improved income as farmers have relatively more grain and sell it to generate income, while in the wet season, sales and revenue are relatively lower. Furthermore, sales on market days are higher than during normal periods in any given month. According to focus group respondents, during droughts, which are frequent in the area, sales decline significantly due to a drop in consumers’ income, as well as due to supply shortages of the raw materials for production and packaging.

Table 12: Average monthly costs, revenue, gross profit and gross margin for baltina agro-processing, by woreda (in Birr)

Woreda Costs Revenue Gross profit Gross margin

Boset 4,580 6,355 1,775 27.9 Arsi Negele 2,660 3,980 1,320 33.2 Shala 3,700 4,800 1,100 22.9 Siraro 4,550 5,500 950 17.3 Source: Based on FGDs and KIIs

5.3.6. Opportunities and challenges

Opportunities • Urban growth Rapid growth of the urban population has led to higher demand for processed food items and hence this is an opportunity for processed pepper products. • Availability of raw materials Unlike other off‑farm activities, raw materials are locally available for the baltina business. In many kebeles of Arsi Negele, Shala, Siraro and Boset, and adjacent woredas, mainly Alaba, there is extensive production of pepper that offers a reliable supply for local agro‑processing.

38 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS • Behavioral change There have been changes in the behavior of consumers, mainly educated youth, who now buy processed foods instead of preparing them at home. This will enhance demand for commercialized agro‑processing businesses (like baltina processing) in villages and urban centers. • Existence of government institutions Various government institutions (Federal Urban Job Creation and Food Security, TVET institutions, Oromia Credit and Saving Share Company) at the woreda level have the potential to provide services like credit, market linkages, training, premises and infrastructure.

Challenges • Cultural norms limit participation of young women In more conservative rural communities, culture still limits active participation of young women in small businesses as they marry early and are then confined to the home. For instance, in Shala, girls from Aje town were actively participating in baltina processing, buying pepper from Alaba and selling it in the local market. However, after marriage, they abandoned the business and were confined to household tasks. Mothers‑in‑law said that newly married women would soon become “weak and unattractive” if they participated in the preparation and sale of hot chili. • Limited market linkages Although there was huge demand for baltina products, mainly red chili, in urban areas, there were limited or no market linkages with potential customers like individual urban consumers, hotels, hospitals, universities, etc. • Lack of working capital Since formal financial institutions would not provide credit to rural women participating in baltina preparation, they were forced to buy raw pepper on credit from traders at higher prices. They usually borrow from traders at a premium of 5 to 10 Birr per kilogram on the prevailing market price, and are required to repay the total loan within 2 weeks. While the purchase on credit provides a vital service, the high markup is costly to poor women. • Weak processing capacity of local producers Due to a lack of technical skills and knowledge, the absence of appropriate processing technologies, and no or limited credit/working capital, the processing capacity of local baltina producers is limited. • Drought‑prone areas Frequent drought in the target woredas had resulted in the failure of pepper crops, which limited the supply to local processors.

5.3.7. Strategic interventions • Provide improved processing technologies The traditional processing methods are labor‑intensive and time‑consuming. Providing technical skills and improved processing technologies would improve the processing efficiency and quality, and benefit more women and girls involved in baltina processing. • Raise awareness Awareness-raising, around traditional beliefs that force women to be confined to the household, could encourage more women and girls to more actively participate along the value chain. • Create/strengthen market linkages among value chain actors. • Credit provision Raising working capital is a critical challenge for women to become engaged in baltina processing, and hence, giving women access to finances is vital for facilitating their greater access.

39 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.4. Value Chain and Market Systems Analysis of Animal‑Drawn Carts

5.4.1. Market actors and customers Animal‑drawn carts are a traditional means of transporting people and goods. They are used to transport crops (during harvest), farm inputs and water. In the study areas, carts were most intensively used on market days to transport people and goods to and from market centers in rural and urban areas. Recently, Asella Rural Technology Promotion Center developed improved technology (better wheels) for animal-drawn carts, which encouraged more people to use them. In several target woredas, such as Shala, Arsi Negele, ATJK, Dodota, and Ziway Dugda, almost all households had at least one donkey cart. The market assessment of this activity was chiefly conducted in the four latter woredas because of their topographic suitability for cart services and favorable weather conditions for rearing donkeys.

In the urban and peri‑urban centers of many woredas (ATJK, Heben Arsi, Arsi Negele, Shala, Siraro and Ziway Dugda), Bajaj three‑wheeler transport has become the dominant means of transporting people. In the rural areas of these woredas, motorized transportation is also rapidly increasing and covers almost all kebeles. It competes with the cart business and threatens its profitability. Yet, given the poor road network, animal‑drawn carts are still a major mode of transport within villages, and during market days in remote areas inaccessible to motorized transportation. It was learned that the Federal Urban Job Creation and Food Security Agency has not included animal‑drawn carts in its job‑creation strategies, arguing that the business is less profitable, and that competition is stiff from motorized transportation. This implies that the possibility of scaling up this business is limited.

Animal‑drawn carts are mainly operated by male youth, as some physical strength is required to manage the animals. Often, uneducated youth are involved in this business. Figure 14: Donkey carts are used to transport people, as well as crops, Operators generally use the carts to fetch farm inputs and water. (Photo by AL-Travelpicture/iStock) water for family consumption, transport their own goods to and from market, and collect grain and crop residue during harvest. Many youth also use them to generate a small subsistence income for their families, but, in rural areas, carts generate income only on market days so the business does not ensure food security or a sustainable income throughout the year. In urban and peri‑urban areas, animal carts are generally used for income generation throughout the week.

The clients of cart transportation include mainly those that have no access to motorized transportation due to the poor road network, high transportation costs and low income. Operators adjust their prices according to the types of goods transported, whether or not it is market day, whether or not it is harvest season, the availability of other means of transport, and the distance to be travelled. In some kebeles, the unit cost is directly related to distance. For example, in Amigna Debeso, 10 km from Dera town, the average cost of transporting a person to town is 10 Birr (1 Birr per km) while, for a quintal (100 kg or 220 pounds) of commodities (grain), it is 30 Birr (3 Birr per km).

40 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.4.2. Input suppliers Labor is generally provided by the owners or their family members. They buy the horse/donkey and its feed from farmers in the local market. The cart is bought from local traders (workshops). Animal health services are provided by local private or public veterinary clinics. The start‑up capital is provided by relatives or friends, and covers the cost of buying horses/donkeys and carts, payment for licenses, the horse shed and initial amount to buy animal feed. The total start‑up capital varied for donkey and horse carts. For a horse‑drawn cart, it was 18,500 to 19,500 Birr. For donkey‑drawn carts, it was about 8,000 to 9,000 Birr (see Figure 16). Of the total initial costs, the price of the cart made up the greatest portion (over 65 percent), followed by the price of the animal (horse or donkey). Since formal financial institutions do not provide credit to such businesses, most operators used capital from their own sources (like agriculture, families, etc.). Government support is also very weak or non‑existent, except for information sharing on traffic regulations, licensing and income tax. Figure 15: Start‑up capital for animal‑drawn carts, by woreda (in Birr)

20000

15000

10000

8,300 9,000 18,500 19,500

5000

0 ATJK Arsi Dodota Ziway Dugda (donkey) Negele (horse) (horse) (donkey)

The operating costs were relatively low and consisted of the cost of feed (bought from nearby towns) and medication for the animal, horseshoes, repair of carts and wheels, and labor (opportunity costs). The average monthly operating costs varied from 2,400 Birr in Dodota to 2,620 Birr in Ziway Dugda (see Table 13). Of the total costs, the opportunity cost of labor made up a significant share, followed by animal feed and other costs like repairs, medication/veterinary services, etc.

Table 13: Average monthly operating costs of animal‑drawn carts, by woreda (in Birr)

Woredas Animal feed Labor Other costs Total (repair, horseshoes, medication) ATJK 880 1,400 190 2,470 Arsi Negele 840 1,500 175 2,515 Dodota 1,000 1,200 200 2,400 Ziway Dugda 960 1,400 260 2,620 Source: Based on FGDs and KIIs

41 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.4.3. Value chain Farmers or traders supply the donkeys and horses, the carts are locally made in metal and wood workshops, and the plastic or metal tires are bought from markets. Animal feed is mostly available from the farms of the owners or their neighbors, in the form of crop residue and grass. Some feed is bought from traders. The operators are youth, while the owners can be men or women. The customers of animal‑drawn cart services are local people who want to travel or transport their goods to market, and farmers transporting their harvest from their farm to home.

Figure 16: Value chain for animal-drawn carts

ANIMAL-DRAWN CARTS

Cart makers

Traders and farmers

MAJOR INPUTS OWNERS/ CONSUMERS Donkeys/horses and carts OPERATORS Farmers mainly on Animal feed Owners: Youth, market days, men and women urban dwellers, Operators: men food catering shops Veterinary service providers

5.4.4. Running costs Of the total operating costs of animal‑drawn carts, labor (mainly opportunity cost) accounted for more 50 percent, followed by animal feed (including opportunity cost of feed from own farms), which was up to 42 percent in Dodota and about 37 percent in Ziway Dugda. Other costs— mainly veterinary care, repairs, horseshoes, etc.—accounted for less than 10 percent of the total operating cost (see Figure 18). In calculating monthly average operating costs, the cost of buying the animal was excluded as the animal is used for 1 to 2 years.

Figure 17: Distribution of operating costs (%) of animal‑drawn carts, by woreda

100 7.7 7 8.3 9.9

80 Other (including repair, horseshoes, medication, etc) Labor

60 56.7 59.6 50 53.4 Animal feed

20 35.6 33.4 41.7 36.6

0 ATJK Arsi Negele Dodota Ziway Dugda

42 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.4.5. Revenue, gross profit and gross margin The average monthly revenue ranged from about 2,900 Birr in Ziway Dugda, and 2,700 Birr in Dodota, to 2,540 Birr in Arsi Negele. The highest monthly gross profit from donkey/horse carts was reported in Dodota (300 Birr) followed by Ziway Dugda (280 Birr), while the lowest was reported in Arsi Negele (25 Birr). The gross margin was lowest in Arsi Negele (1 percent) and ATJK (3.5 percent). In terms of profitability, horse carts were better than donkey carts (see Table 14). In general, animal‑drawn carts are not profitable; rather, operators run the businesses on a subsistence basis.

Table 14: Average monthly costs, revenue, gross profit and gross margin of animal-drawn carts, by woreda (in Birr)

Woredas Costs Revenue Gross profit Gross margin ATJK (donkey) 2,470 2,560 90 3.5 Arsi Negele (donkey) 2,515 2,540 25 1.0 Dodota (horse) 2,400 2,700 300 11.1 Ziway Dugda (horse) 2,620 2,900 280 9.7 Source: Based on FGDs and KIIs 5.4.6. Opportunities and challenges Opportunities • Demand due to high rural‑to‑urban migration A high mobility of people creates demand for animal‑drawn carts, particularly where the rural road network is unsuitable for Bajaj three‑wheeler transport. • Growing business activities In rural villages, peri‑urban and urban areas, there has been continuous expansion of business activities, which require various transport services. Thus, there are good opportunities for cart businesses where motorized transport is limited due to poor roads. Challenges • Stiff competition from three‑wheelers and motorbikes There has been an increasing number of three‑wheelers and motorbikes in rural and peri‑urban areas. Due to their greater speed and convenience, there is an increasing shift in demand towards Bajajs. Hence, the services of carts are limited to certain areas or for particular goods, like transporting water and crop residue from rural areas to villages or peri‑urban areas. • Poor roads In most rural kebeles in the study woredas with horse/donkey carts, roads were in a poor condition, which resulted in the frequent breakdown of carts and injuries to horses/donkeys. • High cost of inputs In recent years, the price of animal feed has been increasing, making it difficult for operators to cover daily feed costs. • Inappropriate use of animals Sometimes operators exploit their animals by loading them beyond their capacity or working them for long hours each day. Combined with poor feeding, inappropriate use of animals results in a high mortality rate of horses and donkeys and the need for frequent replacement of the animals at a high cost. 5.4.7. Strategic interventions • Improve convenience of cart transport There is increasing competition from Bajajs. Besides their speed (time saving), comfort and price are also important variables. Therefore, it is recommended that carts introduce better seats and roofing/sides to offer protection from the elements. • Protect animal rights It is important to respect animal rights by improving feed quantity and quality, and health care, and avoiding overloading and overworking the animals.

43 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.5. Value Chain and Market Systems Analysis of Woodwork Woodworking requires special skills acquired through training or long experience. In urban areas with access to electric power, woodwork businesses have been growing in recent years. These are located in relatively large towns like Ziway, Arsi Negele, Shashamane, Aje and Dera. Since the businesses need electric power, they are usually limited to urban centers like zonal and woreda towns.

5.5.1. Market actors and customers The businesses are skills‑intensive and operators need physical strength. In most cases, the owners and operators of these businesses are qualified, experienced men (youth and adults). Almost all of the workers and owners are graduates (Level 3‑4) of TVET institutions and universities, organized by the Micro and Small Enterprise Development office. In urban centers, TVET institutions provide industry extension services, like skills gap training and technology transfer, to increase the productivity of operators, because the manufacturing sector, including woodwork, is a priority in government efforts to boost industrial growth.

The major products of the business are home and office furniture and fittings (chairs, tables, beds, shelves, sofas, benches, doors, windows, etc). The demand for these products has been increasing with the recent construction boom in towns and surrounding areas. The main clients are households, government offices and institutions (schools and colleges, health centers, training centers and NGOs).

5.5.2. Input suppliers The owners are the prime source of labor, skills and capital. According to the information from FGDs and KIIs, in larger urban centers like Shashamane and Ziway, the initial cost of running a woodwork business was significantly high in relation to the capacity of the potential new entrants (about 30,000 Birr minimum). Hence, it is not affordable for landless women and men and newly graduated youth. The major initial cost is attributed to machinery. In most cases, spare parts for the machines are imported, expensive, and only available in large towns such as Adama, Shashamane and Addis Ababa. Machinery used in woodwork is bought from larger traders in large towns and cities. Raw materials, mainly timber, are also bought from traders. Raw materials can be obtained locally or imported (see Figure 19). Table 15 shows the investment and working capital requirement of a typical woodwork workshop.

Table 15: Initial investment and working capital requirement for woodwork (in Birr)

Equipment and machines Investment cost Drilling machine 4,500 Rotor 5,500 Jigsaw 7,000 Sander 3,500 Compressor 8,000 Hand tools 1,000 Total 29,500 Source: Based on FGDs and KIIs

44 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.5.3. Value chain Figure 18: Value chain for woodwork

WOODWORK

Suppliers

MAJOR INPUTS OPERATORS CONSUMERS Wood, paint, nails, Educated and/or Government institutions, NGOs, varnish, machinery experienced men town/village dwellers and young boys. Owners can be men, women and youth

5.5.4. Running costs The operating costs include raw materials (processed and seasoned wood, chipboard, paint, nails, varnish and various adhesive materials), rent for the working space, wages and labor opportunity costs, and others. The cost is a function of the scale and type of production. Some products, such as doors and sofa sets, are expensive and cost much more than products such as windows, fittings, chairs and tables. On average, the monthly operating cost in the study areas was about 44,550 Birr, of which 28,000 Birr was spent on raw materials and 15,000 Birr on labor as wages and the opportunity cost of operators running their own business. Rent, transportation and electricity made up a limited share of the total operating cost (see Table 16 and Figure 20).

Table 16: Average operating cost of woodwork business per month (in Birr)

Item Operating cost Raw materials (wood, paint, nails, varnish, etc.) 28,000 Wages (including opportunity cost) 15,000 Other costs (transportation, electricity, rent, etc.) 1,550 Total 44,550 Source: Based on FGDs and KIIs

Figure 19: Share of costs in average monthly woodwork operating cost

Other 3%

Wages 34% Raw materials 63%

45 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.5.5. Revenue, gross profit and gross margin The main source of revenue for woodwork workshops comes from sales of manufactured furniture and fixtures. Record‑keeping was generally weak so it was difficult to accurately estimate revenue. However, the focus group discussion with workshop owners indicated that the average monthly revenue was about 60,000 Birr. However, there was seasonal variation as sales tended to increase around holidays. With total operating costs of 44,550 Birr, the average monthly gross profit was about 15,450 Birr (see Figure 21), resulting in a gross margin of 25.75 percent. This indicates that the woodwork business is relatively stable and profitable.

Figure 20: Average monthly costs, revenue and gross profit for woodwork (in Birr)

60000

50000

40000

30000

20000

10000 44,550 60,000 15,450

0 Operating Revenue Gross costs profit

5.5.6. Opportunities and challenges

Opportunities • Construction boom In most urban centers, towns, peri‑urban areas and villages, construction activities are on the increase, creating good opportunities for individuals to engage in woodwork. • Government priority sector The government prioritizes the manufacturing and construction sectors, and, through the Federal Urban Job Creation and Food Security Agency, has encouraged existing operators and new entrants by providing training and technical support, premises and credit. • Increased urbanization Growth in the number and size of urban centers (with its concomitant income growth), means increased demand for home and office furniture. • Demand from government institutions Government institutions, such as schools and health centers, require furniture every year, creating additional demand for these products. But market linkage is needed to develop this opportunity. Challenges • Lack of raw materials and spare parts In general, inputs and spare parts for woodwork are imported from abroad, which is constrained by a shortage of foreign currency. Such shortages escalate input prices, which small businesses struggle to pay. • Lack of infrastructure In most small towns and villages, the electricity supply may be inadequate and frequently interrupted. • Inadequate working and sales premises The government often supplies premises to small business operators organized in groups. However, the supply of premises is inadequate, which constrains the expansion of the sector.

46 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS • Lack of credit The sector is also constrained by a shortage of capital, as formal financial institutions are unwilling to extend credit to small businesses without collateral. • Lack of appropriate support While the government is actively providing services like training and facilitating market linkages in urban centers, these supports are either missing or extremely weak in rural areas.

5.5.7. Strategic interventions • Provide technical skills Most of the woodwork operators produced a limited range of low‑quality products. Building the capacity of operators through skills training would improve the quality and diversity of products, and enhance competitiveness in the market. • Provide access to credit Credit should be facilitated through internal mobilization and/or providing seed money from the government’s Youth Revolving Fund. • Provide affordable premises Lack of access to working space is a challenge. Development practitioners should lobby local government for space. • Strengthen market linkages Access to inputs could be improved by enhancing market linkages across the value chain. • Improve access to electric power This is vital for woodwork. If electric power is already available in a community, the government could be lobbied to connect sufficient power to business premises. In areas where there is no power, such support could be a long‑term goal.

47 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.6. Value Chain and Market Systems Analysis of Construction

5.6.1. Market actors and end users Construction activities—such as masonry, carpentry, painting, electricity installation, and sanitary installation—are off‑farm activities that generate income for youth and landless farmers. In the study areas, participants in construction were all found to be male. Construction is skills‑intensive, and operators need some basic skills. Major operators were youth who had graduated from TVET institutions or universities, and individuals with experience in the sector. The operators were licensed and unlicensed. They undertake construction in the private and government sectors. In Babile, one key informant said he had previous experience in construction and received short‑term training from a TVET institution. Operators may undertake the construction of an entire building, but then sub‑contract some of the work to experts based on their specific skills, such as carpentry or masonry.

The major customers are private individuals and government (schools; health centers; homes for teachers, health and agricultural extension workers, etc.). The demand for home contractors has been increasing in urban and peri‑urban areas as well as in the government sector. As the work is skills‑based, operators are mobile and the activities do not require large initial capital or working premises. However, there is a large number of TVET institution and university graduates in construction and engineering, implying a labor glut and thus reduced demand for further entrants.

5.6.2. Input suppliers The operators’ knowledge and skills are the primary inputs required for this activity. Hired laborers and tools are secondary requirements (see Table 17). The start‑up capital for an individual would mainly be spent on construction hand tools—such as hammers, shovels, plumb bobs, mason’s trowels, tape measures, spirit levels, etc. These can be bought in urban centers such as Harar and Babile towns. According to information from the KIIs, the average initial capital in Babile was about 6,660 Birr (see Table 17), which is relatively low compared to the initial capital for woodwork.

Table 17: Initial cost of construction tools, Babile woreda (in Birr)

Tool Unit Number required Unit cost Total cost Hammer (3kg) pc 2 450 900 Hammer (1.5kg) pc 2 200 400 Carpenter’s hammer pc 5 100 500 Spirit level meter 20 10 200 Tape measures of different lengths pc 3 ‑ 310 Plumb bob pc 1 150 150 Rope pc 10 50 500 Shovel pc 5 100 500 Mason’s trowel pc 10 50 500 Sherira meter 3 100 300 Line level pc 3 100 300 Overalls pc 3 250 750 Safety shoes pc 3 450 1,350 Total 6,660 Source: Based on FGDs and KIIs

48 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.6.3. Value chain Figure 21: Value chain for construction

CONSTRUCTION

Local market

MAJOR INPUTS OPERATORS CLIENTS Construction tools With knowledge Laborers Institutions and (hammers, spirit levels, and skills individuals shovels, etc) Construction materials

5.6.4. Running costs In the construction sector, clients normally supply the raw materials (cement, sand, stone, panels, reinforcement bars, wood and other materials). In most cases, skilled individual contractors hire two or more skilled assistants and about five unskilled daily laborers. Thus, monthly operating costs, including labor and the operator’s opportunity cost, were on average about 30,800 Birr.

5.6.5. Costs, revenue, gross profit and gross margin According to the KIIs, the revenue was seasonal and depended on the size of the construction work. For example, constructing two L‑shaped houses of three bedrooms each, would take about 2 months, and the contractor would get total revenue of 80,000 Birr, indicating an average monthly income of 40,000 Birr (see Figure 23). Thus, the business would generate an average monthly gross profit of about 9,200 Birr. The gross margin would be 23 percent, indicating that the construction sector is profitable and stable.

Figure 22: Average monthly costs, revenue and gross profit of construction (in Birr)

40000

35000

30000

25000

20000

15000

10000

30,800 40,000 9,200 5000

0 Operating Revenue Gross costs profit

49 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.6.6. Opportunities and challenges

Opportunities • Growing demand for house and office construction Demand for housing is increasing. Similarly, government demand for buildings (offices, health centers, FTCs, schools, residential units, etc.) is also increasing. There are also many more investment projects that require construction in both urban and rural areas. These provide opportunities for individuals with the relevant skills and experience. • Government support The government has prioritized the manufacturing and construction sectors, and provides training, market linkages and premises for organized operators of small businesses, mainly in urban centers. For instance, in Babile, a small‑scale contractor can take part in a free 3‑month training course at the woreda TVET institution.

Challenges • Limited market access Work opportunities, especially in the private sector, are not offered on a competitive basis. Customers generally give the work to people they know. In the public construction sector, favoritism and corruption are challenges. This means entry into the business is not easy. • Seasonality Jobs are highly seasonal, depending on the availability of government budget. • Corruption Ostensibly, the government gives priority to organized youth with relevant skills from TVET institutions (Center of Competency certified) and experience in government‑owned construction projects. However, individuals complained about corruption in the bidding process for the construction of government buildings.

5.6.7. Strategic interventions • Upgrade skills Marketing one’s skills is an important part of the business. Therefore, upgrading skills will enhance opportunity and competitiveness in the sector. • Facilitate groups To make individuals more competitive and to facilitate their entry into the market, it is essential that they be organized into groups in the form of MSE. This would have the advantage of access to training opportunities at low cost. • Enhance market linkages Link individuals with private and public construction sectors to build their experience and provide opportunities.

50 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.7. Value Chain and Market Systems Analysis of Sisal Rope Production

5.7.1. Market characterization Sisal is a large aloe‑like plant with coarse, pointed leaves. East and Southern African countries are among the top sisal producing and exporting countries in the world, after Brazil. A sisal plant has a 7‑ to 10‑year lifespan and typically produces 200 to 250 commercially usable leaves. Each leaf contains 1,000 fibers on average, which account for only about 4 percent of the plant’s weight. As sisal requires sunshine and temperatures above 25 degrees Celsius (77 degrees Fahrenheit), it is considered a plant of the tropics and subtropics. In most countries, sisal is domesticated and produced on plots of land. However, in Ethiopia, sisal grows wild, and is accessible for harvesting and collection by local people (Figure 24).

Figure 23: Sisal plant and rope made from sisal fibers

Sisal fibers are used to make products such as rope, twine, carpets, mats, bags and shoes, either by hand or in a factory.

Sales of sisal fiber have declined over the last four decades, mainly due to a decrease in the production of the plant. Greater use of synthetic fibers has also partly contributed to the declining market for sisal fiber products. Yet sisal is still an important input for fiber factories in East Africa. For instance, according to Daily Nation (June 26, 2017), export earnings from sisal rose to 4.1 billion Kenyan shillings in 2016, from 3.7 billion Kenyan shillings in 2015, with sisal products being exported to Nigeria, Morocco, Saudi Arabia and China.

51 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.7.2. Market actors and consumers In Eastern Ethiopia, women and girls are involved in sisal production, which is limited to a traditional system whereby leaves are collected from wild plants in an unorganized manner and the fiber extracted. They produce only rope, which they sell mainly in local markets to local traders/ collectors, who in turn sell it to khat (leaf stimulant) traders, to bind their khat for transportation. Local farmers buy the rope to tie up their animals. This activity is unique to Midega Tola, in East Hararghe.

If supported by technology and skills trainings, operators could use sisal to make carpets, sacks, zembil (woven baskets), and other items. According to the information from key informants, women participate in sisal rope production because it needs no initial capital and no special skills (except traditional ways of making it), and the sisal is collected in the wild. Hence the only input cost is the opportunity cost of the labor.

5.7.3. Value chain There are three market chain actors for sisal rope production and marketing. These are the producers, the local traders/collectors and the large traders from towns like Haramaya and Aweday. Producers of sisal ropes add value by extracting the fiber from plants using traditional methods. These women are the only actors who add significant value to the product. Others (local and larger traders) simply transport the final product from producers in the villages to consumers/ khat traders in Midhega town (capital of the woreda) on market days.

These collectors buy a bundle of 100 ropes for 100 Birr and sell them at a markup of 10 to 20 Birr per 100 ropes. They sell at least one small truckload of ropes per week and hence make a reasonable profit. Large traders transport the ropes as far as Jigjiga and Dire Dawa towns to sell at higher prices.

Figure 24: Value chain for sisal rope production and marketing

SISAL ROPE PRODUCTION MAJOR INPUTS Wild sisal leaves CUSTOMERS Sisal collectors Local Larger and rope makers traders traders Households, and khat traders, who Women and girls Small traders/ Larger traders use the rope to collect the leaves collectors transport the package their khat and make the buy rope and sell rope to ropes to larger traders large towns

52 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.7.4. Running costs Running costs are extremely low. The producers collect wild sisal and make only rope. Besides their own labor (opportunity cost), they use simple hand tools like axes or mencha (scythe‑like agricultural tools) for the cutting and extraction of the fiber from the leaf.

5.7.5. Revenue, gross profit and gross margin Sisal products are mainly 4‑meter‑long ropes. Women who make the rope sell it for about 0.75 to 1 Birr per length. During agricultural harvesting time, the price of rope goes up, as women are busy with agricultural activities so fewer women are producing the rope. During slack times, more women participate in the production and hence the price drops. Local traders/collectors sell ropes to traders for 1.20 Birr, a markup of 0.20 to 0.45 Birr per rope. The price is negotiated between the local trader and the larger traders. Larger traders transport the rope to large towns like Haramaya and Awaday, and sell a length for 2 Birr to khat traders. In most cases, purchases are in bulk.

In the cost analysis, three assumptions were made: (i) an average cost of 0.85 Birr per length of rope, (ii) the production and sale of 600 lengths per individual operator per month, and (iii) the opportunity cost of labor for collecting, separating the fibers and making ropes was calculated at the local wage rate. Women and girls involved in sisal rope production make a gross profit of 110 Birr per month, a gross margin of 21.6 percent. In other words, an operator receives her wage equivalent and an extra 110 Birr per month. Given the time and effort put in, the benefit obtained is reasonably good.

Table 18: Average monthly costs, revenue, gross profit and gross margin of sisal rope (in Birr)

Items Amount Labor costs for rope production (600 pc/month) 400 Revenue (0.85 Birr/pc * 600) 510 Gross profit 110 Gross margin 21.6%

5.7.6. Opportunities and challenges Opportunities • Sisal domestication The plant can be widely grown and easily domesticated. It often grows on land with poor fertility and thus would not need to be grown on land currently under other crops. • Production improvement and product diversification There is already advanced technology in neighboring countries like Kenya to improve plant production and fiber extraction. The range of goods produced could be diversified for local and global markets. Challenges • Lack of appropriate support from government and NGOs This is a forgotten and underutilized sector. No support has been provided to the producers in terms of skills training. • Health issues Producers use traditional methods to extract the fibers by hand, and the liquid from the leaves can irritate and inflame the skin. • Absence of appropriate technology for fiber production There is no technology for separating the fiber from the leaves, making the work labor‑intensive. • Limited negotiating power Prices are low and individual producers have no mechanism to negotiate collectively.

53 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.7.7. Strategic interventions • Domesticate sisal for cultivation on homesteads or around villages for easy access. Introduce improved agronomic practices and better performing varieties for large‑scale commercial farms. • Develop/provide technical support Technical skills training could be provided to improve the quality of production, thus enabling operators to diversify their products into a range of consumer goods. • Introduce appropriate technology Introduce modern fiber separation and processing methods manageable on a small‑scale (household level).

54 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.8. Value Chain and Market Systems Analysis of Hairdressing

5.8.1. Market actors and customers In urban centers with access to electric power, beauty salons/hairdressers (for both men and women) are key small‑scale businesses engaging youth (both male and female). In rural areas and small towns, there is a steady demand for hairdressing by men and women, but the business is limited by the lack of electric power. Yet, some entrepreneurs in rural areas and small towns have bought small generators. Men’s hairdressers in rural villages with no electricity use bought or rented diesel generators, and are active mainly on market days.

Hairdressing requires skills that can be acquired through formal training, mainly at TVET institutions, and through experience. However, none of the youth engaged in hairdressing that were interviewed had had formal training of any sort, and training was not available in most rural areas. Since there are few beauty salons for women in small towns and villages, women seeking these services travel to larger towns. Consequently, with improved access to electricity in rural areas, women’s hairdressing could be a promising business. Similarly, men’s hairdressing, which uses both mechanical and electrical devices, is also a profitable business venture in rural areas and small towns.

In addition to hairdressing, barber shops offer mobile phone charging services at a cost of 2 to 3 Birr per phone.

Customers of beauty salons were youth and adults living nearby or coming to town on market days. As in other small businesses in rural areas, there were more clients on market days. The number of such shops has increased in recent years and, on average, there are at least three hairdressing shops per kebele in most woredas of the Rift Valley.

5.8.2. Input suppliers The operators’ skills and knowledge are the primary inputs. Materials like cosmetics, benzene, alcohol, lubricants, water, etc, are bought from local traders. Either local traders or larger traders in zonal towns supply the hairdressing equipment. The average initial capital required for men’s hairdressing was estimated at about 6,300 Birr in Dodota and 7,360 Birr in Sire. The initial capital for men’s hairdressing included shelves, haircutting machine, rotary chair, working space (rent or own) and relatively small initial working capital. In areas with no electric power, owners had to buy diesel generators at an average cost of 4,000 Birr.

Starting a women’s hairdressing shop cost more than double that of men’s hairdressing shops. According to the focus group discussion, the average startup capital needed was about 15,920 Birr. Including working capital of about 1,000 Birr, the total startup capital was about 16,920 Birr (see Figure 27). There was no credit available from formal financial institutions due to a lack of collateral, indicating that both initial and current working capital was covered using the operators’ own resources, such as savings from other businesses, mainly agriculture, or obtained from family members.

55 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Figure 25:20000 Initial investment cost of hairdressers, by woreda (in Birr)

15000

10000

5000

6,310 7,360 16,920

0 Dodota Sire Boset (men’s) (men’s) (women’s)

5.8.3. Value chain

Figure 26. Value chain for hairdressing

HAIRDRESSING

Input suppliers (traders)

MAJOR INPUTS OPERATORS CUSTOMERS Hair clippers, shelving, Educated and/or Youth (M&F), rotary chair, benzene, experienced women local men and women alcohol, cosmetics, etc and youth (M&F) or those that come to town on market days

5.8.4. Running costs Inputs include materials like benzene, cosmetics, alcohol, lubricants, etc.; labor inputs, including the opportunity cost of the owner’s labor; and costs related to rent, electricity (or fuel) and water. The average monthly cost of materials was about 2,109 Birr in Dodota, 2,930 in Sire, 4,200 in Boset and 5,760 Birr in Dire Dawa city (see Table 19). Raw materials accounted for most of total input costs, ranging from 56 percent in Dire Dawa city to 65 percent in Boset for women’s beauty salons. The share of average monthly labor cost per month was also significant: the highest in Dodota at 36 percent, followed by 27 percent in Sire, 24 percent in Sire and 24 percent in Dire Dawa, indicating that labor costs constituted at least a quarter of average monthly input costs. The share of other inputs (rent, electricity and water) was low in all three woredas (see Figure 29). Generally, operating costs for women’s hairdressing shops were higher than for men’s. Key informants said the cost of raw materials and rent had been increasing, mainly in urban centers like Dire Dawa.

56 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Table 19: Average monthly operating cost of hairdressing, by woreda (in Birr)

Woreda Raw materials Labor (including OC) Other costs Total Dodota (male) 1,200 750 159 2,109 Sire (male) 1,730 800 400 2,930 Boset (female) 2,745 1,000 460 4,205 Dire Dawa (female) 3,200 1,400 1,160 5,760 Source: Based on FGDs and KIIs

Figure 27: Share of input costs (%) for hairdressing, by woreda 120

7.6 13.7 10.9 20.1

100 Other (including repair, horseshoes, medication, etc) Labor (including OC) 80 35.6 27.3 23.8 24.3 Raw materials

40 56.9 59 65.3 55.6

0 Dodota Sire Boset Dire Dawa (Male) (Male) (Female) (Female)

5.8.5. Revenue, gross profit and gross margin In men’s hairdressing shops, revenue is generated both from hair cutting and mobile phone charging. The unit price for a haircut is 10 Birr per person, while the unit price of mobile charging is 2 Birr per mobile phone. Men’s hairdressers provide a single hairdressing service, while women’s hairdressers provide three services; kawuya (hair smoothed and straightened with hair irons), sheruba (traditional braided hairstyle) and kask (hair washed and dried with hairdryer). The charge varies depending on the sophistication and power consumption of the service. According to information from FGDs, kask and sheruba services cost 20 Birr each while kawuya costs 30 Birr. In both cases, price setting had no relationship to the supply or cost of inputs, or cost of initial capital.

In Dodota, the average monthly revenue from men’s hairdressing shops was about 2,600 Birr, with a gross profit of 491 Birr per month, while in Sire, the average monthly revenue was 3,520 Birr for a gross profit of 590 Birr. The revenue generated varied according to holidays and wedding ceremonies. The average monthly revenue for a women’s hairdressing shop was about 4,960 Birr, for a gross profit of 755 Birr (see Table 20). Much of the revenue of these shops (about 88 percent) was obtained from washing, drying and smoothing services.

Table 20: Average monthly costs, revenue, gross profit and gross margin for hairdressing, by woreda (in Birr)

Woreda Costs Revenue Gross profit Gross margin (%) Dodota (male) 2,109 2,600 491 18.9 Sire (male) 2,930 3,520 590 16.8 Boset (female) 4,205 4,960 755 15.2 Dire Dawa (female) 5,760 7,200 1,440 20 Source: Based on FGDs and KIIs

57 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Gross margin varied from 15 percent in Boset to about 20 percent in Dire Dawa city, indicating that hairdressing is less stable in small villages and peri‑urban areas. The gross margin of women’s hairdressers was higher than that of men’s (see Table 20). This is mainly attributed to differences in the level of revenue generated, as more women than men frequently visit hairdressers.

5.8.6. Challenges and opportunities

Opportunities • Increased urban growth Growing numbers of people in urban centers and villages mean a greater demand for hairdressing and personal care services. • Growing awareness Youth in villages and urban centers have a growing awareness of beauty and personal care, resulting in increased demand for such services. • Existence of institutions In most urban centers, there are TVET institutions, and in major zonal capitals (Adama, Asella, Arsi Negele, Shashamane, etc.), there are private training centers, that can train youth in hairdressing and personal care techniques.

Challenges • Shortage of premises In urban and peri‑urban centers, there is a limited availability of premises or these are too expensive to rent, which limits the expansion potential of hairdressing shops. • Limited credit There is a lack of initial capital for those starting out, and inadequate working capital for those already in business to diversify and expand. • Inadequate government support Government support for private individuals involved in hairdressing is nearly non-existent. • Lack of water and power Electricity and water are not available in most small towns and villages. Using generators increases the cost of starting and running a business. Lack of access to sustainable electricity and water supplies reduces the potential profitability of hairdressing in small towns and villages, by increasing costs and reducing efficiency (as manually cutting hair takes longer).

5.8.7. Strategic interventions • Provide premises The government should take responsibility for facilitating the availability of working space, supported by development partners. • Improve access to credit Women’s hairdressing in particular has significant start‑up costs, which are beyond the means of poor youth and women. Seed money could be made available from the government’s Youth Revolving Fund and/or through funds internally mobilized through self‑help groups. Furthermore, linkages with MFI are advisable to sustain and grow established businesses. • Improve access to water and electricity Lobbying government for reliable water and electricity supplies could be a longer‑term goal.

58 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.9. Value Chain and Market Systems Analysis of Bakeries

5.9.1. Producers and consumers Running a bakery requires a reliable electricity supply so these businesses are mainly feasible only in urban centers, and villages around Dire Dawa, Deder town and Malka Balo. Yet some bakeries operate using firewood or generators.

In the study area, only men (adults and youth) were engaged in baking. Baking needs special skills related to food preparation, which can be obtained through training and/or previous experience. According to information from FGDs and KIIs, none of the bakery owners had formal training, indicating that most ran their businesses based on previous experience.

Bakeries in towns and villages supply bread of different sizes and biscuits to local communities, shops, cafes, restaurants and tea houses. Thus, customers are households (for home consumption), shops (for retailing), cafes, restaurants, and tea houses (selling bread with tea). Starting a bakery requires huge capital for the equipment (at least 25,000 Birr for mixer and oven), and other inputs (rent, electricity, etc.).

5.9.2. Input suppliers Bakeries require various inputs: raw materials (flour, oil, yeast, salt, water, sugar, firewood); labor, including the opportunity costs of owners; and other inputs like electricity, rent and transportation. These are obtained from sources such as farmers (firewood), traders and/or cooperatives (ingredients).

5.9.3. Average costs The average monthly cost of ingredients was about 15,700 Birr, making up most of the total operating cost, followed by labor (9,000 Birr), which accounted for 32 percent of the total cost (see Figure 30). Other costs like rent, transportation, etc. constituted about 12 percent.

20000 Figure 28: Average monthly major input costs of bakeries (in Birr)

15000

10000

5000

15,700 9,000 3,500

0 Raw materials Labor Other costs (including OC) (rent, etc)

5.9.4. Revenue, gross profit and gross margin The price of a small loaf of bread was 1 Birr in Malka Balo and Dire Dawa town, but was 2 Birr in Deder town due to the difference in the level of control by the woreda (as local government controls price and grams of breads sold). The total average monthly cost of running a bakery was 28,200 and revenue was 37,800 Birr, generating a gross profit of 9,600 Birr (see Figure 31). The gross margin of bakeries in the study woredas was over 25 percent, indicating that the business is profitable. However, the barrier to entering the business is the high initial investment cost for machinery.

59 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Figure 29: Average monthly costs, revenue and gross profit of bakeries (in Birr)

40000

35000

30000

25000

20000

15000

10000

5000 28,200 37,800 9,600

0 Cost Revenue Gross profit

5.9.5. Value chain In the bakery value chain, there are actors like machinery suppliers (in large towns like Dire Dawa) and suppliers of raw materials like ingredients and firewood. The operators are mainly men (youth and adult) due to the high capital requirement that women cannot raise.

Figure 30: Value chain for bakeries

BAKERIES

Traders and farmers

MAJOR INPUTS OPERATORS CUSTOMERS Oven (fixed asset) and Better-off men, as women Households, shops, cafes, raw materials and youth cannot raise restaurants and tea houses (ingredients, firewood) required start-up capital. (bread to sell with tea) In larger zonal and/or woreda towns 5.9.6. Opportunities and challenges

Opportunities • Increased urbanization Due to the expansion of government centers, rural-to-urban migration and the clustering of villages, the urban population has been growing, thus boosting demand for processed agricultural outputs and cooked food like bread. Due to behavioral changes, the demand for bread among rural people is also increasing. A large volume of bread sales, particularly on market days in rural areas, was reported by the focus group participants. • Income growth In rural and urban areas, there have been significant increases in income (mainly that of daily laborers and farmers), which has resulted in a growth in demand for food in general and bread in particular.

Challenges • Lack of capital The bakery business is capital intensive due to the high cost of machinery, and most individuals, mainly youth and women, are unable to access sufficient credit from formal financial institutions due to their lack of collateral. • Lack of premises A shortage of premises is a challenge, mainly in towns.

60 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS • Limited power supply In most towns and woredas, there is limited basic infrastructure like electric power, which has forced operators to rely on generators and/or firewood. These alternative sources of energy increase production costs and hence reduce gross margins. • Shortage of flour Grain supply is generally short in the PSNP areas. Flour is a crucial ingredient for baking, but the supply is intermittent, limiting the sustainable supply of bread to meet the demands of consumers.

5.9.7. Strategic interventions • Improve access to capital, premises and power supply These are similar to all the other off- farm activities already mentioned above. • Improve flour supply To ensure reliable profit from bakeries, a sustainable supply of wheat is critical. Creating market linkages with suppliers and enhancing the stock capacity of bakeries through bulk purchases are recommended.

61 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.10. Value Chain and Market Systems Analysis of Weaving

5.10.1. Operators and end users Weaving businesses were seen in Malka Balo and Deder in East Hararghe. These were owned and operated by elderly men who had inherited the skills from their fathers; women simply assisted their husbands. In most villages and peri-urban areas, weavers are considered to be of a lower social status and are relatively poor, with limited land resources for agricultural activities. They use traditional equipment that can be made locally or bought in local markets.

While weavers in large towns and cities make better-quality traditional clothes with beautiful designs (mainly for women), weavers in Malka Balo and Deder produced a single traditional product: single and double gabi (handwoven cloth). The activity is mainly conducted on a subsistence basis, with custom mainly from local residents (mainly elderly people from rural areas, as youth from urban centers do not wear these products). This implies that unless these producers are supported with modern technology, and produce market-driven products, the weaving business in woredas may quickly lose its competitiveness.

5.10.2. Input suppliers The traditional weaving equipment is bought from local markets. The weavers use machine‑spun thread (kir) and hand-woven cotton to make single and double gabis. At a cost of 3,200 Birr, weavers buy enough thread from the local market to produce 16 single gabis and 8 double gabis monthly. The other input cost is labor, which is mainly the opportunity cost of the weavers.

The average monthly labor cost, including opportunity cost, was estimated at 2,600 Birr, while other costs —including rent, transportation, etc— were about 1,400 Birr (see Figure 34). Due to the traditional technology and the limited skills of the weavers, the products are of low quality, and bought by poor households in rural areas. The demand is limited in urban areas. Traders generally buy high-quality traditional clothes, mainly for women, from large urban centers. The demand for better-designed traditional clothes is increasing among customers (mainly youth) in towns and urban centers.

Figure 31: Average monthly operating costs for weaving (in Birr)

3500

3000

2500

2000

1500

1000

500 3,200 2,600 1,400

0 Raw materials Labor Other costs

62 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.10.3. Value chain The weavers buy their equipment from the local market and/or make it by themselves. The cloth produced by the weavers is directly supplied to the local market and bought by local people (see Figure 35).

Figure 32: Value chain for weaving

WEAVING Local market Local market Weavers

EQUIPMENT RAW MATERIALS OPERATORS CUSTOMERS Weavers buy equipment Materials are bought at Weavers are usually Local residents from the local market or local market elderly men who have (mainly elderly people make it themselves inherited the skills from from rural areas) their fathers

5.10.4. Revenue, gross profit and gross margin The average monthly production of a typical weaver is about 16 single gabis and 8 double gabis. A single gabi costs 250 Birr, while a double gabi costs 500 Birr. Thus, the total revenue generated is about 8,000 Birr per month. Since the average monthly cost was about 7,200 Birr, the average monthly gross profit was 800 Birr (see Figure 36). The gross margin was about 10 percent, indicating that the business is not profitable.

Figure 33: Average monthly cost, revenue and gross profit of weaving (in Birr)

8000

7000

6000

5000

4000

3000

2000

1000 7,200 8,000 800

0 Costs Revenue Gross profit

63 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 5.10.5. Opportunities and challenges

Opportunities • Reliable demand for traditional clothes Most clothes produced by weavers are made from cotton, which is comfortable for all weather conditions. For well-designed, good-quality traditional clothes, demand and prices are increasing, ensuring the availability of a market. The use of traditional textiles for clothing, home decor, celebrations, etc., is extensive in both urban and rural areas by all groups of society, men and women, youth, children, and the elderly). • Availability of local institutions TVETCs, FTCs, Federal Urban Job Creation and Food Security office, etc., are all potentially useful for technical support.

Challenges • Limited skills Weavers in villages and rural areas lack the skills to produce the better-designed, high-quality garments demanded by the market. • Lack of modern weaving technology The traditional technology is labor-intensive. • Lack of working and sales premises Weavers in small towns produce and sell in small rooms, that may be not conducive to productivity and to the youth consumers.

5.10.6. Strategic intervention areas Although weaving has a long history in Ethiopia, government and development partners have given little attention to its value chain development. Nevertheless, the demand for the products, with improved quality and design, is booming. Shiro Meda in Addis Ababa provides a good example of a robust textile market, and the products are increasingly exported. Lessons from Shiro Meda could be replicated for rural weaving value chain development. Enhancing the skills of the operators for quality and diversified production, introducing modern weaving technology, and providing business premises, are key areas for strategic intervention.

64 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 6. TECHNICAL SUPPORT AND STAKEHOLDERS

In rural areas, most off-farm activities are related to agriculture (crop production and livestock rearing) and natural resources extraction (stone, sand, etc.). Some of these have been supported by agricultural extension agents and the Federal Urban Job Creation and Food Security Agency. These include fattening of livestock and small ruminants, trading in livestock and small ruminants, beekeeping, seedling production, dairy farming, poultry production, grain trade, etc. Meanwhile, other off-farm activities in rural areas—such as agro-processing (pepper and beans), food catering, metalwork and woodwork, transport (donkey/horse carts and Bajaj), retail shops, sisal rope production, beauty salons and personal care services—have received no technical support from government institutions. The operators and/or owners personally shoulder the responsibility for raising initial capital, arranging premises (mainly rented), and seeking the necessary skills to run the business.

However, recently, government institutions and NGOs have started providing some support to off-farm businesses in villages, small towns and rural areas. Yet, most government institutions, like the Federal Urban Job Creation and Food Security Agency and TVETCs have focused on organized micro and small enterprises in urban centers. Some of the institutions and the supports they provide are summarized here:

6.1. Support-providing Bureaus and TVETs

1. Federal Urban Job Creation and Food Security Agency This was formerly known as the Micro and Small Enterprise Development Agency and mainly focused on organized micro and small enterprise operators in urban centers. Now the agency has been mandated to provide some technical support to organized micro and small enterprise operators in villages, small towns and peri-urban areas. The agency is focused on organized or grouped individuals who have already started saving, but offers little or no support to individually owned businesses such as shops and food catering outlets. The main technical support is in areas such as organizing operators into a legal body (licensing); providing short-term training on how to start a business; filling skills gaps; helping prepare businesses to access financial services; preparing and facilitating working/selling premises in collaboration with the Land Administration Bureau; creating market linkages for infant micro and small enterprises; and providing audit services for existing businesses.

In all the visited target woredas and Dire Dawa city, the agency is actively organizing youth into one of seven sectors, namely: urban agriculture, manufacturing, construction, fattening, natural resources extraction, trade and services, financed by the government’s Youth Revolving Fund and financial institutions. The experience among the agency’s staff in these areas is relatively rich despite significant human resources and logistical limitations. In the majority of the woredas, the number of staff is less than half the required number, and none of the bureaus have cars, although some use motorcycles. The number of computers for the entire staff of a bureau is one or two. Despite such limitations, the bureau is a direct stakeholder in the implementation of off-farm activities in urban as well as rural areas.

65 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 2. Labor and Social Affairs Bureau This office plays an insignificant role in the promotion of rural off-farm activities. It simply registers and verifies the number of unemployed youth, in collaboration with the kebele administrations, and submits lists of jobseekers to the Federal Urban Job Creation and Food Security Agency offices of the woredas. Generally, the Labor and Social Affairs Bureau is more active in larger urban centers, but has limited engagement in villages, small towns and peri-urban areas.

3. Trade and Market Development Bureau Once youths are organized into groups by the Federal Urban Job Creation and Food Security Agency, the Trade and Market Development Bureau is responsible for the provision of trade licenses in urban areas. Although mostly only active in urban areas, in recent years it has started working in rural areas, particularly in legalizing rural businesses. The licensing procedure is effective, with an automated system. Once the youths are organized into groups and have fulfilled all criteria (identification, tax identification number, capital, working premises), the provision of the license takes less than an hour, as long as the data network is in operation. Payment is also affordable. For a trade license, the office charges 210 Birr (105 Birr for registration and 105 Birr for licensing). To renew a trade license costs 105 Birr per year.

4. Technical and Vocational Education and Training Colleges The general policy direction of the Government of Ethiopia is to provide training (regular and short-term) to off-farm business owners, and award successful trainees with Center of Competence (CoC) certification. The certification could be for multiple competencies or a unit competency (UC). For each type of training, there are standard modules that trainees have to complete. Thus, TVETCs are critical institutions in skills development. The colleges also provide industry extension services, focusing on four major areas. First, they attempt to increase productivity and production to improve the amount and quality of products mainly via Kaizen (continuous incremental improvement). Second, they the fill skills gaps of existing businesses by providing short-term training. The gaps are identified by experts from the colleges and the business owners themselves. Third, they are involved in technology transfer (in the form of hardware and software/prototypes) to successful business owners mainly in larger urban centers. Such technology transfer is aimed at improving the quality of products. Fourth, they provide entrepreneurship training (bookkeeping, market assessment, etc.) to new and existing business owners. These four services are offered mainly in urban centers, but missing in most villages, small towns and peri‑urban areas.

In each of the targeted woredas, there was at least one TVET center or college. The colleges are located in the administrative centers of the woredas, provide short- and long-term training in various skills, and award successful trainees with Center of Competence certificates. TVETCs in most woredas—except Heben Arsi, Siraro and Sire—have a college-level training status providing Levels 1 to 4 training to regular students in various specialization areas, such as woodwork, welding (metalwork), masonry, bar bending and joinery, garments (tailoring and embroidery), information and communication technology (hardware network services, information technology security services), survey and road construction, and business and on-site building management. The institutions in Heben Arsi, Siraro and Sire provide training in IT, automotive technology and garments. TVET institutions in these woredas have a status lower than college-level and are poorly staffed and equipped. The remaining TVET institutions are colleges with a credible quality of education and training, and more or less capacity in terms of human resources and workshops. The

66 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS cost of training is cheaper than in the private sector. The budgets of the TVETCs are provided by the regional government. Some also generate their own income through various training programs and products (for example, furniture and products manufactured during training workshops), even though this constitutes only a small portion of the total budget requirement. A number of these TVETCs (according to FGDs) provided free training to private, NGO and government-sponsored trainees. Some have also worked with NGOs that paid for training inputs and allowances for the trainers. The TVETCs can also mobilize human resources from other areas in case there are no adequate or credible human resources for the subject matter. Therefore, in general, in most woredas, the current capacity and working conditions of TVETCs are adequate and promising for providing training in skills and business tools. However, some TVETCs in woredas like Siraro need intervention from the government and NGOs to equip them with facilities and human resources.

5. Agriculture and Natural Resources Office: Livestock Agency The agency has established structures at the kebele level and provides extensive agricultural extension services to activities related to agriculture (crop production and livestock rearing). Its role in promoting off-farm activities is negligible. However, its presence at the community level does offer an opportunity to assist those engaged in agriculture-related off-farm activities, in collaboration with relevant bureaus and stakeholders.

6.2. Financial Institutions

1. Microfinance institutions There were various microfinance institutions operating in the target woredas, including the Oromia Credit and Savings Share Company (OCSSCO), Gasha, Wasassa and others. OCSSCO is the largest microfinance institution in all woredas, with a large number of outreach centers, providing almost all financial services for a large number of rural and urban customers. The company provides loans to organized youths at a 13 percent flat interest rate through the Federal Urban Job Creation and Food Security Agency, and to individual/private borrowers at a 17 percent interest rate. Each borrower (group or individual) must first open a savings account with the company and save at least 10 percent of the total amount of the loan they need.

In previous years, mayors of towns and woreda administrators in rural areas provided surety for group borrowers. However, due to a high default rate, the company now needs collateral such as houses and site plans, car ownership certificates, etc. for borrowers in urban centers, while borrowers from rural areas must provide land ownership certificates as collateral. The company is also responsible for the disbursement of the government’s Youth Revolving Fund at an interest rate of 8 percent (with no administrative charge) and interest-free global fund. The Gasha and Metemamen microfinance institutions also provide savings and loan services and provide credit for many farm households supported by various programs. These two MFIs offer an 18 percent interest rate and require a 10 percent savings guarantee to grant loan services. Metemamen and Gasha MFI are active in Boset and Ziway Dugda.

Some MFIs have worked with NGOs on loan-guarantee schemes. Therefore, the three MFIs could potentially provide savings and loan services for established off-farm activities and businesses in both rural and urban areas. Until recently, the MFIs supported urban off-farm activities and provided loans for agriculture-related activities in rural areas. The maximum loan provided by Metemamen is 5,000 Birr for the first loan, growing by 1,000 Birr for each subsequent cycle. The maximum loan period is about a year, although this varies according to the type of investment. OCSSCO imposes no limit

67 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS on the loan amount. Every group can obtain the amount required once they have fulfilled all the preconditions, such as providing identification and the legal name of the group, saved 10 percent of the loan amount, produced a legal status certificate, provided group collateral (where one individual serves as collateral for another), and others. According to the institution, the maximum period required to process a loan is less than a month once all preconditions have been met and all required documentation has been produced.

2. Public and private commercial banks A number of branches of public and private commercial banks are located in all woreda capitals. The Oromia International Bank, the Cooperative Bank of Oromia, and the Commercial Bank of Ethiopia all operate in all woredas. They provide savings and loan services, mainly to large-scale operations. However, for rural small-scale off-farm activities, loan services are constrained by lack of collateral, and fear of default. In recent years, the certification of land and the possibility of using it as collateral has been getting attention, particularly among MFIs. However, among large-scale public and private banks, a loan service for small businesses is still not available. With a loan-guarantee scheme, however, they could provide affordable loan services for rural non-farm activities.

6.3. Nongovernmental Organizations In all 14 target woredas in Oromia region and Dire Dawa city, several nongovernmental organizations were actively engaged in supporting the livelihoods of local communities. In the Rift Valley, for instance, Save the Children, Hundee, World Vision, Donkeys for Development (D4D) and CRS are operating to ensure sustainable food security of the local communities.

68 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 7. GENERAL OPPORTUNITIES AND CHALLENGES

This section summarizes major opportunities and challenges common to all the selected off-farm activities in the study areas.

7.1. Opportunities • Increased urbanization There is a general trend towards urban growth. The expansion and decentralization of government institutions to the grassroots level, increasing rural-to-urban migration, and the clustering of villages into towns, creates opportunities for both sides of off- farm markets, i.e. there is both increased supply and increased demand for off-farm products. • Better rural transportation In the last 5 years, the Government of Ethiopia has aggressively worked to develop rural road networks, linking kebeles to woreda towns, and kebeles to kebeles. Although there was criticism of the quality of the roads among key informants, the roads have created a greater opportunity for rural–urban linkages and better access to markets. Consequently, off-farm activities have been stimulated in towns and rural villages. • Growing income In the country in general, and CRS-targeted woredas in particular, there seems to be a general increase in income, including among daily laborers and farmers. This has had an impact on demand for various products and services, and thus created opportunities for off‑farm businesses to flourish. • Behavioral or cultural change There have been changes in the behaviors of rural consumers, who now buy more processed food items (such as macaroni, cooking oil, soft drinks) and prepared food, instead of preparing food at home. The rural demand for products such as household furniture and equipment is also increasing. Rural youth are also creating demand for personal care services (like hairdressing), sanitary items (such as cosmetics and detergents), and fashionable clothing. • Youth and women friendliness Interestingly, almost all selected off-farm activities are women‑ and youth- friendly, the societal groups that make up most of the population and deserve development and policy attention. • Government institutions The various government institutions (Federal Urban Job Creation and Food Security Agency, TVETCs, FTCs, savings and loan associations) at the kebele and woreda levels have the potential to provide various services like credit, market linkages, training, facilitation of premises and infrastructure provisions, if their capacity is built further.

7.2. Challenges • Lack of enough capital/credit The primary challenge to off-farm activities is the lack of start‑up capital and credit for expansion. Without exception, all the selected small businesses in all 14 target woredas were suffering from a lack of capital (both initial and working capital). Information from FGDs and KIIs showed that almost all business owners had started their businesses using meager finance obtained from their own sources or families. Lack of access to credit inhibited youth and women from entering into off-farm activities and restricted the scale of operations of existing businesses.

69 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS • Lack of premises Perhaps lack of premises is the second most critical factor limiting interested youth and women from participating in off-farm activities. The results of the field assessment show that premises were either absent or expensive to rent, eroding the profit of the actors. Moreover, working space (or lack thereof) was found to greatly impact the scale, efficiency, quality and profitability of off-farm products and services. • Lack of skills Nearly all off-farm operators and interested groups interviewed had not received any relevant skills training. They were dependent on inherited traditional skills learned from their parents, neighbors or friends, or on experience in the field. As a result, the quality, diversity and quantity of their products and services were below the standard demanded by customers and were unable to compete with imported items. • Lack of technology Absence of improved technologies (ways of doing things or new ideas) is another important factor affecting the performance of off-farm value chain development. There is little research and development effort in this area. • Lack of financial literacy and weak entrepreneurship Beyond effective and efficient production, business knowledge is vital to success. The off-farm operators largely lacked financial literacy and entrepreneurial skills. Their financial record-keeping was poor, and they had little understanding of whether or not their efforts were viable. Most operators (particularly private businesses) had not had any training on preparing business plans, market development, customer service, product promotion, etc. • Weak market linkages Linkages among value chain actors are absent or weak. The purchase of inputs and the sales of products (services) are often done randomly. • Low level of awareness of self-starting Most youths have migrated to large urban centers to be hired in private or government institutions. There is limited awareness among community members of the potential for creating self-initiated businesses. The awareness is especially low among rural girls and women, and hence better awareness among women is crucial in increasing their participation in small businesses. • Seasonal supply and demand Supplies of agricultural products like vegetables, grain and raw pepper are seasonal, and fluctuate according to harvest periods, which has a direct and indirect effect on supply of and demand for the products of off-farm activities (such as food catering, baltina, etc). Also, farming communities constitute the major consumers of off-farm products in the study areas, therefore, the seasonality of agricultural production affects both the income of the consumer and the supply of the producer. • Lack of infrastructure Water and power supplies are basic infrastructure requirements for the smooth operation of all types of off-farm businesses but were missing in many of villages and small towns in the target areas. Areas already connected to electricity grids and water supplies experienced frequent failure. Thus, any off-farm intervention that does not address this lack may have limited impact on sustainable value chain development. This should be called to the attention of government and development partners.

70 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 8. CONCLUSIONS AND INTERVENTION STRATEGIES

This section concludes the study and summarizes possible strategic interventions for the identified challenges and problems.

8.1. Conclusions This study was aimed at assessing the value chains and market systems of off-farm activities in 14 woredas of Oromia state and Dire Dawa city using primary data generated through focus group discussions with rural households, and key informant interviews with experts and small business operators in rural villages, peri-urban areas and small towns. Based on the findings of the assessment, the following conclusions have been drawn.

• Value chain upgrading and market functioning The identified off-farm activities can be characterized as having weak value chains and poor market systems. Most of the actors had not received any formal skills training. They used their experience in traditional processing/ production of goods and services, and thus there had been little attempt to upgrade the value chains. Although the sale of goods is functioning well, other market functions such as pricing systems and facilitation (standardization, financing and market intelligence) were almost absent. • Short market chain The chain from primary producer to end consumer was short; that is, there were few or no intermediaries. Operators of off-farm activities used inputs available in the community and produced products for consumers in the same community. • Lack access to credit services The operators and potential operators of off-farm businesses were generally confronted with the challenge of meager start-up finance and working capital, and had a low income-generating capacity. Startup capital was generally from their own sources and there was limited access to credit from financial institutions due to a lack of collateral. • Profit orientation Except in a few cases (entrepreneurs), the establishment of off-farm business for the majority was not based on matching identified consumer needs and wants with organizational resources. Rather, the operators were involved in the activities mainly to supplement their other livelihoods. Operators were running low-profit (subsistence) businesses driven by a spirit of survival rather than aimed at profit maximization. This adversely affected motivations for value addition. • Gross margins (a measure of financial profitability) for all the off-farm activities were found to be positive, even when taking into account the opportunity costs of the operators. This indicates that their economic benefit was considerable. A positive gross margin, even if it is not large, means that the operators are at least earning a wage at the market rate, as well as generating some extra money, which is appreciable given the economic status of the participants in the PSNP area. • Youth- and women-friendliness Most of the businesses (food catering shops, retail shops, animal‑drawn carts, baltina agro-processing, hairdressing, sisal rope production, etc.) were owned and/or operated by youth (male and female) and/or women. • Seasonal business Some of the businesses were seasonal, and ran during slack (non-harvest) times, but shut down when the operators were engaged in agricultural activities.

71 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS • Lack of strategy The results of the institutional and stakeholder assessments show that there was little government attention given to off-farm value chains and market development in rural areas. For instance, there was no clear off-farm development strategy document at either the federal or regional level. • Opportunities for intervention Small businesses in villages, small towns and peri-urban area support the livelihoods of numerous households. These activities provide opportunities and have an enormous prospect for growth. While there are complex challenges—including lack of financial resources, limited skills, weak market linkages, the absence of improved technology and poor infrastructure (premises, water and power)—these provide opportunities for strategic intervention from government and development partners. • Potential for development Many off-farm activities have the potential for development if the recommended interventions are put in place. However, the prospects for animal-drawn carts are gloomy because of the transformation of transportation services. In addition, the lack of electric power in rural areas (small villages) would challenge any attempt to intervene in woodwork activities. Therefore, the consulting team has reservations in recommending interventions in the development of animal-drawn cart services or woodwork activities by short-term projects like DFSA and LRO.

8.2. General Common Intervention Strategies Specific strategic interventions in value chain development of the selected off-farm activities is discussed above. Here, key strategic interventions common to all the activities are presented.

Short term (within 1 year) Key strategies for value chain development that can be accomplished in the short term include:

• Provide skills training Skills training is critically important to improving the mode of production/ services, quality and efficiency. Similarly, to improve the marketability of products, training in the areas of market development, promotion and pricing is relevant. Developing a knowledge and application of bookkeeping and financial management are of paramount importance. Building the skills and capacities of the actors in business development services (BDS) or entrepreneurship (such as client services, business plan development, etc) is also a priority in the intervention areas. The effectiveness of the training depends on its quality and adequacy in terms of curricula, and the experience and talent of the trainers. • Facilitate market linkages The inputs and product markets of off-farm activities are at a nascent stage, and are poorer than those of agricultural products in Ethiopia. Therefore, major input suppliers, end users and off-farm operators for each selected commodity must first be identified. Then, a forum for exchange should be created so that participants can share their capacity in terms of supply or demand (quantity, quality, types), pricing, terms of agreement for exchange, etc. • Create access to credit and linkage to the government’s Youth Revolving Fund Lack of access to finance is perhaps the largest barrier to entry into and expansion of off-farm businesses, and the situation is worse in food-insecure communities. As collateral is a limiting factor for loans from formal financial institutions, the best alternative is replicating the success stories of SILC groups, as established by CRS interventions, and self-help groups (SHG) established by Hundee. SILCs are regarded as best practice, and are sustainable in mobilizing resources for savings and credit services among actors with a common interest. Perhaps more important is to link off‑farm value chain development to the government’s Youth Revolving Fund for job creation. The fund can be used as a revolving grant and address the financial needs of many actors.

72 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Medium term (2 to 3 years) • Introduce improved technologies In many cases, off-farm activities are performed manually with traditional tools that are time- and labor-intensive, and produce poor quality products in limited quantities. Therefore, interventions need to identify improved means of production. Coupled with skills training, such improved technologies would enable off-farm operators to develop the value chain by improving the quality, diversity and quantity of production. • Improve access to premises The problem of finding suitable and affordable work space was common to most actors in the study areas and most serious for those in peri-urban areas and towns, restricting entry into the business, and the scale and capacity of existing operations. It is strongly recommended that the government be lobbied to make land available in appropriate locations and to construct premises for groups of common interest. The management of the premises should be properly defined. These facilities are a necessary condition for the commencement and promotion of off-farm businesses in both rural and urban areas.

Long term (3 to 5 years) • Improve supply of water and power Basic infrastructure is generally poor in all rural areas of the country, and it is unlikely the government will be able to address this problem in the short term. Nevertheless, access to water and electric power is a key factor in the development of off-farm businesses. As part of basic service delivery and rural electrification strategies, the government should be lobbied to give special attention to off-farm operators if the huge livelihoods potential of this sector is to be tapped.

73 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS 9. REFERENCES

Andae G (June 26, 2017) Sisal earnings hit Sh4bn as exports reduce local supply. Daily Nation. Ayyagari M, Demirgüç-Kunt A, and Maksimovic V (2011) Small vs. young firms across the world: Contribution to employment, job creation, and growth. The World Bank Policy Research Working Paper 5631, Washington, DC: The World Bank. Babatunde OR (2016) On-farm and off-farm works: Complement or substitute? Evidence from rural Nigeria. 2013 AAAE Fourth International Conference, September 22-25, 2013, Hammamet, Tunisia 160437, African Association of Agricultural Economists (AAAE). Gesese SK and Mberengwa I (2012) The Role of off- and non-farm activities in achieving sustainable rural livelihoods security in Gubalfto Woreda, North Wollo Zone, Amhara Region State, Ethiopia. Journal of Sustainable Development in Africa, Volume 14, No.5, 2012. Gordon A and Craig C (2001). Rural non-farm activities and poverty alleviation in Sub-Saharan Africa, NRI Policy Series 14. Natural Resources Institute, University of Greenwich. Katega IB and Lifuliro CS (2015) Rural non-farm activities and poverty alleviation in Tanzania: A case study of two villages in Chamwino and Bahi districts of Dodoma Region. Dar es Salaam, Tanzania: Research on Poverty Alleviation. Kipnis H (2013) Financing women-owned SMEs: A case study in Ethiopia. Washington, DC: United States Agency for International Development (USAID). Page J and Söderbom M (2012) Is small beautiful? Small enterprise, aid and employment in Africa. UNU-WIDER Working Paper 2012/94.

74 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS ANNEXES

Annex I: Checklists for Phase I

A. At the federal/regional level 1. What are policies and strategies for developing off-farm self-employment opportunities in the country? Collect all other relevant documents/reports related to off-farm/non-farm activities in the country. 2. What are existing off-farm activities in Ethiopia? 3. Indicate criteria to rank these lists of off-farm activities in the country and rank the top three according to these criteria. 4. What supports do the federal offices provide to regional bureaus to facilitate development of off-farm businesses? What are challenges related to these supports? 5. What are challenges and constraints in developing the off-farm value chain in the country? 6. What solutions do you suggest for overcoming these problems and developing the value chain for off-farm activities?

B. At the woreda level 1. Do you have strategies for developing off-farm self-employment opportunities in your woreda? 2. What are these strategies? Collect all other relevant documents/reports related to off-farm/ non-farm activities in the woreda. 3. List all existing off-farm activities in your woreda. 4. Indicate the concentration of off-farm activities by kebele. 5. Indicate/set criteria to rank these lists of off-farm activities in your woreda and rank the top three according to these criteria. 6. Who are the main actors in the top three off-farm activities? 7. What are the support-providing institutions (providing training, credit, extension services, input supplies, etc.)? 8. What are the weaknesses and strengths of these supports? 9. What are the challenges and constraints in developing off-farm activities (production, accessing market, existence of market, sales prices, etc.)? 10. What solutions do you suggest for overcoming these problems and developing the value chain for off-farm activities?

75 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS C. At the kebele and community level 1. Do you have strategies for developing off-farm self-employment opportunities in your kebeles? 2. What are these strategies? Collect all other relevant documents/reports related to off-farm/ non-farm activities in the woreda. 3. List all existing off-farm activities in your kebeles. 4. Indicate the concentration of off-farm activities by community. 5. Indicate/set criteria to rank these lists of off-farm activities in your kebeles and rank the top three according to these criteria. 6. Who are the main actors in the top three off-farm activities? 7. What are the support-providing institutions (providing training, credit, extension services, input suppliers, etc.)? 8. What are the weaknesses and strengths of these supports? 9. What are the challenges and constraints in developing off-farm activities (production, accessing market, existence of market, sales prices, etc.)? 10. What solutions do you suggest for overcoming these problems and developing the value chain for off-farm activities?

76 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Annex II: Checklists for the supply and demand situation analysis of off-farm activities

Food catering shop A. Food preparation No. Types of food served Number of food services per day Unit price 1 Shiro/beyanet 2 Egg with bread/injera 3 Injera firfir 4 Coffee/tea 5 Bread 6 Other

Number of days you work per week: ______(days per week)

B. Inputs used No. Types of inputs Sources of inputs Amount purchased Total cost per (farmers, traders, own, etc.) per week week 1 Teff 2 Wheat 3 Maize 4 Granulated coffee 5 Tea 6 Sugar 7 Onions 8 Shiro 9 Spices 10 Charcoal 11 Firewood 12 Others

Prices of food items Items Year (EC) 2005 2006 2007 2008 2009 Shiro/beyanet Egg with bread/injera Injera firfir Coffee/tea Bread

77 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS C. Other input costs (labor, rent, transportation costs) Labor: Permanent ______(number) Daily laborer ______(number) Wage in Birr ______(per month) Gender ______(male) ______(female)

Family/owners: ______(number). Gender: ______Opportunity cost ______(Birr per month) Transportation cost: ______(Birr per week) Other costs (specify): ______(Birr per month)

D. Supply and demand situation • Who are your customers? Government employees, farmers, daily laborers, passersby? • How do you see demand for food in your area? Increasing/decreasing/no change since you started the business? • What about the number of small cafes like yours in this area? Is it increasing/decreasing/no change since you started the business?

E. Supports and credit Sources of start-up capital ______(Amount in Birr ______) Sources of current working capital ______(Amount in Birr ______) Types of supports from government (premises, training) ______

Types of training ______Gaps in training ______Types of training you need ______

F. Challenges and opportunities • What are the major challenges of your business and suggested solutions? ______• What are the major opportunities of your business? ______

G. Other issues ______

78 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Woodwork A. Retail prices No. Type of product Amount produced Unit cost Unit price Gross profit per month Chair Table Bed Shelf Door Window Bench Other

B. Materials and equipment used in production Materials ______(cost per month) Equipment ______(cost per month)

Labor: Permanent ______(number) Daily laborer ______(number) Wage in Birr ______(per month) Gender ______(male) ______(female)

Family/owners: ______(number). Gender: ______Opportunity cost ______(Birr per month) Transportation cost: ______(Birr per week) Other costs (specify): ______(Birr per month)

C. Supply and demand situation • Who are your customers? Government employees, farmers, daily laborers, any passersby? • How do you see demand for wood products in your area? Increasing, decreasing, no change since you started the business? • What about the number of woodwork shops like yours in this area? Are they increasing, decreasing, no change since you started the business?

D. Supports and credit Sources of start-up capital ______(Amount in Birr ______) Sources of current working capital ______(Amount in Birr ______) Types of supports from government (premises, training) ______

Types of training ______Gaps in training ______Types of training you need ______

79 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS E. Challenges and opportunities • What are the major challenges of your business and suggested solutions? ______• What are the major opportunities of your business? ______

F. Other issues ______

Donkey/Horse-drawn carts A. Costs Number of days you work per week ______(days) Revenue per day ______(Birr) Inputs costs: donkey feed per day ______(Birr), maintenance ______(Birr per month) labor costs ______, other costs ______

B. Supports and credit Sources of start-up capital ______(Amount in Birr ______) Sources of current working capital ______(Amount in Birr ______) Types of supports from government (premises, training) ______

Types of training ______Gaps in training ______Types of training you need ______

C. Supply and demand • Who are your customers? • How do you see demand for animal-drawn cart transportation in your area? Increasing, decreasing, no change since you started the business? • What about the number of animal-drawn carts like yours in this area? Are they increasing, decreasing, no change since you started the business? D. Challenges and opportunities • What are the major challenges of your business and suggested solutions? ______• What are the major opportunities of your business? ______

80 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Retail shops A. Items traded No. Items traded Unit cost unit price Price margin Sugar Coffee Tea Biscuits Salt Matches Candy Soap Cosmetics Others

Types of training ______Gaps in training ______Types of training you need ______

C. Supply and demand • Who are your customers? • How do you see demand for retail shops in your area? Increasing, decreasing, no change since you started the business? • What about the number of retail shops like yours in this area? Are they increasing, decreasing, no change since you started the business? D. Challenges and opportunities • What are the major challenges of your business and suggested solutions? ______• What are the major opportunities of your business? ______

81 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS Baltina agro-processing A. Types of products No. Product Amount produced Amount sold Unit price Gross profit per month (kg) per month (kg) Shiro Pepper Kollo Spices Other

Number of days you work per week ______(days per week)

B. Inputs used No. Types of input Sources of inputs Amount purchased Total cost (farmers, traders, own, etc.) per week per week 1 Teff 2 Wheat 3 Maize 4 Pepper 5 Barley 6 Millet 7 Beans/peas 8 Ginger 9 Onion 10 Garlic 11 Kororma 12 Others

Types of training ______Gaps in training ______Types of training you need ______

C. Supply and demand • Who are your customers? • How do you see demand for baltina processing in your area? Increasing, decreasing, no change since you started the business? • What about the baltina processors in this area? Are they increasing, decreasing, no change since you started the business?

82 OFF‑FARM VALUE CHAIN AND MARKET SYSTEMS ANALYSIS D. Challenges and opportunities • What are the major challenges of your business and suggested solutions? ______• What are the major opportunities of your business? ______

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