INVESTMENT OPPORTUNITIES IN THE COTTON, TEXTILES, AND GARMENTS INDUSTRY IN

AUGUST 2019 This investment brief has been built based on ~35 stakeholder interviews conducted with key players across the cotton, textiles, and garments value chain

Production Ginning & Yarn Fabric Final Product/ Garment Buyers Government/ Processing Processing Manufacturing Associations Completed • Chato Ginning • Urafiki Tanzania Global • Prime Minister’s Cooperative • Olam • 21st century • Mazava • Zara (Inditex) Office (PMO) Union (CCU) • Alliance • Sunflag • Tooku • Ex-PVH contact • Textile and • Ukiliguru • Sifa Threads • Mbeya Knitwear • East Canvas Garment Research Yarn processing • Sunflag* Limited Manufacturers Institute • Tabotex • A to Z Textile* • Hennes & Mauritz Association • Tanzania • 21st Century* (H&M) (TEGAMAT) Cotton Board • World Bank (TCB) Global/Regional Tanzania Consultant • TAL Apparel • Best Western Hotel • Textile • Crystal Group • Advent Construction Development • Village Industry • Shanta Gold Unit (TDU) • Shydee Mine/Acacia • Rainbow packaging • Muhimbili Hospital • Aga Khan Hospital • Medical Stores Department (MSD) • Nabaki Afrika Outreach n/a Ginning • Mwatex Global Global complete, no • Gaki • NIDA • Carrollas • Max Fashion interview • Columbia packaging • Phillips-Van Heusen conducted Yarn processing • Big Agnes (PVH) • Dahong • Walmart

2 *These players are vertically integrated in Tanzania Tanzania is a powerhouse for cotton production in ; 30% of locally grown cotton feeds the local textile industry while the rest is exported

PRODUCTION VOLUMES ACROSS MAJOR MARKETS FOR LOCAL COTTON MAJOR COTTON PRODUCERS IN 2017 IN 2017 Total production, ‘000 MT Percentage of total production, % (2017)

217 15% 16%

78 13% 32 13

Ethiopia Tanzania 8% 30% In year 2017 Tanzania was leading in cotton production in the EAC region. With a 74% increase in cotton harvest in 2019 Tanzania has become a cotton 18% powerhouse in the EAC region

Local market Bangladesh Mauritius However, 70% of the cotton lint produced in the country is exported abroad mainly to Bangladesh, Export market Indonesia Others India, and Indonesia. Only 30% of cotton lint is India consumed locally

Source: FAOSTAT, Cotton production by each country, 2019; UNACTAD, Cotton and its by-products in the 3 united republic of Tanzania, 2016.; OEC, Where does Tanzania export Raw Cotton to?, 2017 The majority of cotton that is sold locally is used to produce traditional fabrics and garments for local and regional markets

Input Value-addition activities Output

Yarn processing Fabric processing Garment manufacturing

Bedsheets

Curtains Finished non- ~14.6% of 70% of traditional fabric T-shirts lint is yarn is exported exported Polo

Garment factories Sportwear • Sunflag • 21st Century Denim • NIDA Non-traditional Raw cotton Lint Yarn Fabric Uniforms fabric for garments

Shirts, other apparel Local tailors Kitenge, Kikoy

Cotton seed This segment of the value chain is broken down in Maasai shuka more detail on the next slide Traditional fabric

Source: Dalberg interviews 4 Once raw cotton is ginned, cotton seed is further processed into husk, cotton cake, oil and linters used in a range of products for local markets

Input Value-addition activities Output

Animals feed 10%-14% of seeds are reserved for next season Husk Natural Fertilizers 25%-27%

Soap & Cosmetics

Cotton cake 45%-55% Pharmaceuticals

Cooking oil Cotton seed* De-linting Dehulling Kernel pressing Or extraction Oil 12%-16% Margarine

Mattress stuffing

Linters Photographic films 8%-10%

* There is 4% waste cotton cumulated across all stages but not shown in the mapping above 5 Source: UNCTAD, Cotton and its by-products in the united republic of Tanzania, 2016, Local garment manufacturers catering to global markets in the US and EU need to import yarn and/or fabrics to maintain global quality standards

Input Value-addition activities Output Fabric processing Garment manufacturing

T-shirts 85% of fabric used

Denim Imported fabric

Garment Baby clothes manufacturing 15% of fabric used • Mazava • Tooku • A to Z Sportwear Imported yarn Locally-manufactured fabric

Polo

Imported

Source: Dalberg Interviews 6 In the long term, Tanzania’s ambition is to improve the quality of locally grown cotton such that it can be used in for value-added products in the global market

The Cotton-To-Clothing Strategy 2016- The Government prioritized the following 2020 prioritized the following objectives activities to meet these objectives: for the cotton value chain: • Increase production of cotton in Tanzania • Improve economic outcomes to make it the leading cotton producer in for farmers Tanzania. The long-term target is to attain one million tonnes by 2023

• Improve employment • Improve domestic cotton processing within outcomes, including Tanzania by facilitating investments along profitability of the value chain the value chain and expanding value addition at the AMCOs level

• Increase export value and • Facilitate financing through the Tanzania volumes to regional and global Agriculture Development Bank (TADB) to drive priorities above markets

The Cotton-to-Clothing Strategy has been successful in increasing production, and it will now need to shift its focus on increasing quality in coming years

Source: Government: Our Current, Future Plans for Cotton Sub-Sector (2019); Tanzania’s Cotton to 7 Clothing Strategy 2016-2020; Dalberg Interviews Today, there are various barriers along the value chain that limit Tanzania’s ability to develop value-added products, especially for the global market

Production & Garment Yarn processing Fabric processing Market Ginning manufacturing

Low quality cotton Lack of standalone fabric Lack of standalone fabric Garment production by Tap into US/EU markets Tanzania currently produces mills for supply of yarn factories for supply of fabric importing fabric Global buyers are aiming for medium staple cotton, which In Tanzania, existing fabric In Tanzania, existing Garment manufacturing (that “80% Africa 20% Asia” converts into lower quality mills are vertically standalone garment factories will ultimately drive vertical sourcing strategy by 2025. yarn and fabric that is not integrated. Thus, there are no source imported fabric. There integration) can first be This shift in sourcing strategy accepted by global markets. players to take in any are no players to take in fabric tapped into through importing will drive buyers’ appetite to There are several barriers to processed yarn from a from a standalone fabric mill. fabric. It is least capital- and push their manufacturers to investing in high-quality standalone spinning mill even This is only relevant if quality of technical-intensive, and invest in Tanzania cotton, including harvesting if it imports yarn. This is only cotton improves results in high employment tools, poor ginning relevant if quality of cotton

Global market Global equipment, availability of improves high-quality cotton for blending

Acceptable cotton quality Vertical integration by sourcing local cotton Expand on existing markets for most buyers Through vertical integration that sources local cotton, Tanzania can capitalize on and expand and tap into higher-end The medium staple cotton existing penetration into local and regional markets. Today, one vertically integrated local markets produced today is generally manufacturer (sourcing local cotton) exports 60% end garment sales to regional markets, and the Quality of garments (both acceptable by most regional rest of the 40% to local markets. There is a second vertically integrated player (sourcing local from a cotton and finishing buyers, but may require cotton) who exports 20% of its end garment products to regional markets, and the rest of the 80% lens) produced will have to be

market upgrading when high-end to local markets. Both manufacturers sell all their textiles to the local market improved if higher-end Regional Regional buyers are targeted buyers in e.g. MENA, are Vertical integration for new manufacturers that tap into local cotton can be done through 1) targeted integration from within a company or 2) sourcing from standalone suppliers. A strong vertical integration model built for local and regional markets build a strong base for vertical integration for Acceptable cotton quality Saturated market by global markets in the future for all buyers Chinese imports The medium staple cotton The local market is saturated produced today is acceptable by Chinese imports of for the textiles (e.g. kitenge, garments and traditional khanga) and garment (e.g. T- fabrics (e.g. kitenge). Unless Local

market shirts) produced for the local imports are curbed, market expansion of local production will be difficult

= High barrier = Medium barrier = Low barrier 8 Source: Dalberg stakeholder interviews Tanzania can take a three-step approach to overcome barriers and create a fully integrated cotton-textiles-garments industry over 10 years SHORT-TERM MEDIUM-TERM LONG-TERM 0-3 years 3-5 years 5-10 years

Inconsistent quality Improved quality of High-quality of local raw cotton local raw cotton local raw cotton

• The current quality of cotton does not • Efforts to improve quality of cotton • Over time, the quality of Tanzanian meet global standards for garment production and handling will lead to cotton will improve and it will meet the manufacturing catering to global improvements in staple length, which can quality standards and consistency Production markets. This cotton can be used in the then be blended with higher-quality required by global markets regional and local markets only cotton in the medium-term 9

Imported yarn Garment Fabric Yarn processing Cotton lint High-quality or fabric manufacturing processing Ginning local raw cotton

• Investors set up garment manufacturing • Investors (including existing garment • Manufacturers fully integrate into the in Tanzania to access global markets manufacturers) begin to invest in fabric local value chain by sourcing fabric Global markets Global • Manufacturers rely on imported fabric in processing and then yarn processing as and/or yarn made from local Tanzanian the short term the quality of cotton begins to improve cotton, which will have better quality

x2 x4 the current the current Garment Garment Local raw export value Garment export value manufacturing cotton manufacturing manufacturing • Manufacturers are all fully integrated • The improving quality of cotton allows • The high quality of local cotton allows

markets into the local value chain today, with manufacturers to expand into new manufacturers to expand into new many players vertically integrated from products and regional markets within regions, such as the Middle East and ginning to garment manufacturing local, EAC and SADC markets. This North Africa, and to expand access to Regional and and Regional local increases the volume of local cotton higher-value garments flowing into local industries 9 The Government of Tanzania can take several steps in the short-, medium-, and long-term to achieve this vision of full value chain integration

SHORT-TERM MEDIUM-TERM LONG-TERM 0-3 years 3-5 years 5-10 years

• Improve harvesting and post-harvesting • As quality of cotton gradually improves, • As quality of cotton begins to optimize to handling techniques to improve quality of blend local cotton with imported higher- the capacity of the existing seed variety, cotton for further value addition quality cotton from neighboring incentivize investments in ginning • Revive or invest in drip irrigation countries factories focused on the use of rollers schemes to provide consistent water instead of sawing machinery levels to cotton farms Production

• Expand number of EPZA sites • Provide financing for investments in new • Create tax incentives/breaks for • Finance ready-to-go premises for rent or or upgrading fabric and yarn processing manufacturers across the value chain to upgrade existing facilities not in use • Create tax incentives/breaks for use local raw materials, e.g. removal of • Develop a fund to subsidize worker investors using local raw materials VAT similar to incentive provided in wages during training period • Provide a power and water tariff subsidy Kenya • Provide low-cost financing for garment for fabric and yarn processors manufacturers ($3-4 million) Global markets • Provide a power tariff subsidy

• Provide a price-based subsidy to farmers • Launch the Tanzanian Mercantile • Improve market linkages into additional to hedge against price fluctuations, Exchange to develop financial markets for different garment varieties, similar to countries like China instruments that can provide a hedge such as Middle East as well as other • Respect and strengthen collection of against price fluctuations markets existing import levy on garments and • Invest in improvements in machinery to

markets traditional fabrics improve efficiency of fabric and yarn • Improve market linkages into regional processing, where relevant

Regional and local markets for different garment varieties • Provide power and water tariff relief to reduce cost of production 10 In 5-10 years, Tanzania can build a fully-integrated value chain to supply local cotton yarn and fabric to ~20 garment manufacturers serving all markets

Raw cotton Lint processing Yarn processing Fabric Garment production processing manufacturing

3 5 5 ~20 Lint processors in 5 Yarn processors in 5 Fabric processors in 5 Garment manufacturers years years years in 5 years*

120,400 MT 48,200 MT 43,000 MT 39,000 MT 120 million of cotton required to of cotton lint produced of all yarn required of all fabric required pieces of all garments meet demand from 20 processed garment manufacturers 60,185 900 3,000 2,500 20,000 Farmers engaged Lint/ginning workers Yarn workers across all Fabric workers across Garment workers across all investors investors all investors across all investors

$1.5 million $10-20 million** $10-20 million** $3-4 million Minimum investment Minimum investment Estimated investment Investment required required for one required for one required for one for one processor processor processor processor DRAFT ONLY Note: *The number of garment manufacturers in 5 years is based on the number of manufacturers in Ethiopia by 2017; **The investment size of $10 million is estimated for a fabric processor with 8,400 MT 11 optimal capacity, however, this needs further validation In the short term, Tanzania can start by exploring two specific investment opportunities in the sector

1 IMMEDIATE OPPORTUNITY IN 2 MANUFACTURING EXPANSION GARMENT MANUFACTURING INTO REGIONAL AND LOCAL FOR GLOBAL MARKETS MARKETS

There is an immediate opportunity for Simultaneously, there is an opportunity for Tanzania to tap into garment manufacturing Tanzania’s fully integrated local to supply to the global markets in the US and manufacturers to expand into regional and EU local markets

• In the short-term, garment manufacturers • Although there are opportunities along the rely on imported fabric or yarn to ensure value chain, Tanzania can achieve greater quality standards are maintained margins in garment manufacturing than other manufacturing along the value chain • In the medium to long term, garment manufacturers integrate vertically into local • In order to expand into these markets, cotton value chain Tanzania needs to focus on unlocking existing bottlenecks rather than attracting new investments

12 IMMEDIATE OPPORTUNITY1 IN GARMENT MANUFACTURING FOR GLOBAL MARKETS China alone accounted for USD 145 billion of global apparel/garment exports 1 in 2017, while all of Africa exported USD 9.5 billion only

GLOBAL DEMAND GLOBAL SUPPLY TANZANIA’S SUPPLY

• Total global trade of apparel was • China, EU, Bangladesh and • The total value of apparel exports valued at USD 455 billion while Vietnam remained the world’s top in 2017 was USD 60 million, a 1.5- total global trade of textiles was four apparel/garment exporters in fold increase from 2014. Non-knit valued at USD 296 billion in 2017 2017, accounting for 76% of the garments account for 70% of market share apparel exports • EU, US and Japan remained the top three importers of apparel in 2017, • China is exporting less • The top export destinations for together importing 62% of global apparel/garments and is playing an knit and non-knit apparel is the apparel. China is quickly becoming increasingly critical role as a United States (31%), South Africa one of the world’s largest textile supplier for many apparel- (17%) and Kenya (5%) apparel/garment importers, exporting countries in Asia. For experiencing nearly 17% annual example: 47% of Bangladesh’s growth since 2010, which suggests textile imports came from China in China’s declining dominance in the 2017, up from 39% in 2005. Similar apparel/garment industry trends are seen in Cambodia (up from 30% to 65%), Vietnam (23% to • The shifting pattern of garment 50%) etc. manufacturing from developed to developing countries is also influencing diversification of textile imports. EU, US and China were the top three largest importers of textiles in 2017 (38% of the global market), however, their import share has dropped significantly from over 50% in the 2000s

14 Source: WTO (2018), Just-Style Apparel Sourcing Strategy, ITC Trademap 2018 Global buyers are aiming for “80% Africa 20% Asia” sourcing strategy by 2025 to 1 capitalize on lower costs of production and current US import tariffs on China

China US import tariffs on China have led to waves of factories closing down, many of which moved to Vietnam

Bangladesh Bangladesh will not be able to provide the power supply needed if the capacity of manufacturers increases significantly

EAC Top global buyers (e.g. PVH, H&M) are Vietnam shifting their sourcing base to EAC, Vietnam is the next target for US aiming for a “80% Africa 20% Asia” India import tariffs, which does not split by 2025. This is both an interest India does not provide a very guarantee investors’ long-term in diversifying investments or sourcing conducive business stability from across countries. They have environment for foreign Sri Lanka started with Kenya and Ethiopia, and investors Sri Lanka’s production costs have aim to diversify further. One company risen significantly in recent years will start sourcing from a Tanzanian manufacturer this year 15 Source: Dalberg stakeholder interviews When diversifying into East Africa, global buyers focus on garment manufacturing 1 in the short-term, and vertical integration into local value chains in the medium to long-term

YEAR 1- 3 YEAR 3- 5 YEAR 5+

GARMENT FABRIC YARN MANUFACTURING PROCESSING PROCESSING+ Buyers’ demand drive the entire value Garment manufacturers’ demand Fabric processors’ demand drive chain production. As the final drive the rest of the value chain the rest of the value chain downstream activity, garment production. Once garment production. Once fabric processors manufacturing is the closest step to producers are in EAC, they drive are in EAC, they drive investments meet this demand investments in fabric processing in yarn processing using local cotton High labor intensive, resulting into × Highly capital- and technical- lower costs for investors and high intensive, resulting in higher costs × Highly capital- and technical- employment outcomes for investors and low employment intensive, resulting in higher costs outcomes for investors and low employment Least capital- and technical- outcomes intensive, requiring limited capital × The garment producer requires and technical know-how upfront imported high-quality fabric. Local × The fabric processor requires cotton does not often have the imported high-quality yarn. Local There are fewer bottlenecks to quality required, hence not used in cotton does not often have the unlock the short-term. Fabric quality required, hence not used in × The buyer requires imported high- manufacturers integrate into the the short-term quality fabric. Local cotton does not local cotton value chain in the long- often have the quality required, hence run not used in the short-term

16 Source: Dalberg interviews There is an immediate opportunity to attract garment manufacturers to 1 Tanzania, relying on imported fabric in the short-term

Potential target buyers for Tanzania, who have begun or shown interest in sourcing from East Africa, particularly Ethiopia, include but are not limited to:

There are three top-tier manufacturers of export garments in Tanzania: (Tooku – denims, Mazava – sportswear, A to Z – knitted wear). These manufacturers lack the capacity to meet the increasing demand of large volumes from buyers. As a result, there is an opportunity for new investments or expansion in garment manufacturing in Tanzania to meet this growing demand

Similar to global trends, all top-tier manufacturers in Tanzania who export garments to global markets import fabric or yarn from China and India. The imported fabric has long length staple that Tanzania cannot currently provide.

Tanzania can position itself for investments in garment manufacturing, as global buyers shift their sourcing strategy to “80% Africa 20% Asia” by 2025. Tanzania can benefit from the following: • Direct access to exports – by importing fabric, garments can be produced at a high quality to tap into export markets through AGOA and EBA incentives • Lower capital costs and technical requirements – garment manufacturing is c. 2-2.5x less costly than yarn and fabric processing due to lower capital requirements. It also requires less technicalities • High employment – Garment manufacturing employs c. 1.5-2x more workers than yarn and fabric processing

17 Source: Dalberg interviews Investment case: A USD 3-4 million investment in garment manufacturing is 1 sufficient to set up a factory producing 500k pieces per month

INVESTMENT ECONOMICS UNIT COST BREAKDOWN 2 A minimum investment of USD 3-4 million in a USD/T-shirt garment factory in an EPZA with capacity to 1.8 produce 500,000 pieces/month 0.3 The factory would likely produce low-complex products, such as knitted wear, for sale to export markets. Export markets include US/EU 0.4 buyers of basic goods, e.g., PVH

1.0 0.1 Description Estimate

CAPEX requirement1 c. USD 2 M Illustrative profits as this entirely Number of 1,000 depends on what a buyer decides to employees pay a manufacturer Time to breakeven 2+ years Production volume 500,000 pieces/month Raw Labor Utilities Profit Revenue materials/inputs

Note: 1. CAPEX requirement includes machinery and construction costs. 2. Unit cost breakdown is illustrative using T-shirt as an example, and excludes costs such as import, export, and transport costs. Total unit cost usually ranges from USD 1.5-2/T-shirt, and profits depend on what a buyer decides to pay the manufacturer 18 Source: Dalberg interviews Tanzania will need to create incentives to attract investments in 1 garment manufacturing and in the long-run, integrate vertically into the local value chain

A INCENTIVIZE INVESTORS INTO B INCENTIVIZE INTEGRATION GARMENT MANUFACTURING INTO LOCAL VALUE CHAIN

Tanzania can incentivize investors to tap into Tanzania can create the right incentives to the immediate opportunity in garment encourage vertical integration into the local manufacturing cotton value chain in the long-run

• Foreign investors focus on cost advantages, • Vertical integration often starts with fabric delivery speed and political stability. These manufacturing, and then expands into yarn can determine incentive structures the manufacturing over time Government puts in place • Vertical integration can either be done • Local investors in current or new garment through the garment investors own manufacturing require incentives that can investments into fabric or yarn processing, make them equally competitive in the global or through independent processors markets as investors based within EPZAs in providing a service to a network of garment Tanzania manufacturers. This is determined by the type or sensitivity of the product quality and oversight

19 A INCENTIVIZING INVESTORS INTO GARMENT MANUFACTURING Improving overall attractiveness to draw one ‘lead goose’ foreign garment 1A investor can bring in waves of buyers and manufacturers

FLYING GEESE PARADIGM LEAD GOOSE GARMENT INVESTMENT IN ETHIOPIA

• This phenomenon has also been seen on the investor level, as garment manufacturing moved into East Africa, primarily Ethiopia • In Ethiopia, PVH (buyer) and Huajian Group (manufacturer) played the ‘lead goose’ roles that attracted other buyers and manufacturers to build the garment industry Ethiopia has today

• The Flying Geese Paradigm (FGP) is a concept LEAD GOOSE GARMENT INVESTMENT IN TANZANIA used to describe transformation of industries within individual regions or countries • Similar to Ethiopia, Tanzania can encourage one first sizeable ‘lead goose’ garment investment that can • The FGP was first used by Akamatsu to facilitate the attraction of other investments describe East Asia’s catch-up with the West. In the East Asia scenario, the lead goose • In many instances, this scenario works better when meant introduction of a new industry that led investors move into one EPZA where efforts of to the introduction of more advanced consolidating resources are focused industries over time

Source: A Historical Pattern of Economic Growth in Developing Countries (Akamatsu, 1962), “Multilevel Flying Geese and Spatially Concentrated Investment: Building Light Manufacturing in 21 Africa” (Mawji, 2017), Tanzania’s Industrialization Journey, 2016-2056 (2017) Governmental level invitation, commitments, and ability to deliver on 1A commitments are critical to attract and maintain top foreign buyers and manufacturers

PRESIDENTIAL LEVEL GOVERNMENT INVITATION COMMITMENTS  Former Prime Minister of PVH/Ethiopia Case Study Ethiopia Meles Zenawi personally went to China and  PVH has seen many invited Huajian Group to set impressive national plans, up shoe factory operations in but what impressed PVH Ethiopia about Ethiopia was the government’s willingness  Former President of and ability to deliver on its A ‘lead goose’ Uzbekistan Islam Karimov stated objectives investor will be personally invited Daewoo attracted to invest to set up joint-venture  While neighboring countries automotive operations in such as Kenya fell through on in Tanzania Uzbekistan certain commitments despite providing higher labor  Founding father of Singapore productivity, Ethiopia Lee Kuan Yew personally worked diligently and attended CEO forums in transparently to make sure New York and made a case that PVH’s needs were met for companies to set up in Singapore

Source: “Multilevel Flying Geese and Spatially Concentrated Investment: Building Light Manufacturing in Africa” (Mawji, 2017), “Looking Beyond the Horizon: A case study of PVH’s commitment to 22 Ethiopia’s Hawassa Industrial Park” (World Bank, 2017) In addition to Government commitment, top foreign brands have four key 1A considerations when selecting locations for garment manufacturing

QUALITY COST SPEED STABILITY • Quality is a ‘must-have’ • Key factors that impact costs • Key factors that impact speed • Key factors that impact factor for investors, driven of production include fixed include worker efficiency stability include political (e.g. primarily by buyer costs (e.g. built-in levels, consistency levels and risk of war) and economic (e.g. requirements infrastructure) and variable speed of transportation (lead access to FOREX) risks costs (e.g. electricity) time) • Key factors that impact • Tanzania has a 20% political quality range from the cotton • Tanzania’s relatively low • Low worker productivity is stability premium and easier quality itself to the results of labor costs is core to its value similar across East Africa, access to FOREX, making her product handling (e.g. sewing proposition. However, poor however, significantly lower more attractive for investors skills of a worker) labor productivity (50-60% of than global standards. Lower • Manufacturers who have international levels) increases productivity is slightly • Tanzania’s cotton of medium decided to invest in Tanzania overall costs. mitigated by low labor costs staple does not meet top expressed that the country’s global buyers’ standards that • Tanzania also has high • Tanzania’s lengthy and costly high stability is a crucial require higher quality cotton construction, electricity and trade and logistic procedures factor that drew them to of long staple water costs relative to is perceived to be a challenge Tanzania as an investment regional peers. Tanzania is by buyers. Tanzania is destination • Tanzania can invest in improving the quality of currently making investments currently improving custom cotton in the short-term and in electricity and ports that is processes – including length integrating into the global likely to improve Tanzania’s and cost of processes – value chain in the long-run competitiveness as through the Blueprint. These improvements are realized improvements can improve lead time for shipments

23 Source: Dalberg stakeholder interviews Tanzania will need to improve investments in plug-and-play premises to be 1A competitive regionally to attract foreign investments for global exports

Tanzania Kenya Ethiopia Recommendations Cross-cutting incentives

Incentives Key incentives include: Key incentives include: Key incentives include: • Similar to Ethiopia, low-interest loans can be • Tax holiday for 10 • Tax holiday for 10 years • Tax holiday for 8-10 offered to upgrade the technology of the sector years • VAT exemption and years • Similar to Kenya, Tanzania could offer VAT • VAT exemption on customs import duty on • Duty-free import of exemption for EPZA manufacturers who source utilities and inputs, as well as on local raw materials and raw materials locally. This will become construction purchases of goods and capital goods increasingly important as garment manufacturers materials services supplied by • Loans at an interest pursue vertical integration in the long-run • Duty-free import companies in the Kenyan as low as 3-4% duty on capital customs territory interest are offered goods and raw • Investors who construct to upgrade the materials their buildings are able to technology of the • Duty-free access refund the costs sector through AGOA • Duty-free access through • Duty-free access (US)/EBA (EU) AGOA, EBA through AGOA, EBA Fixed costs

Plug and Play premises Partial Complete Complete • Option 1: TADB can set up a fund to invest in building factory sheds across strategic EPZAs. EPZA can focus on building all premises in one industrial park, and replicate for others • Option 2: Leverage existing facilitates that are not in use (e.g. mills, factories) to be upgraded and folded into EPZA premises for new investors

Premises for expansion Restricted Unrestricted Unrestricted • EPZA can expand number of EPZA sites to attract new investors and encourage expansion of existing investors

Road infrastructure Road quality varies Most roads are in poor Most roads are in poor • Road infrastructure outside of the Central Zone greatly across the condition condition, especially in (e.g. Lake Zone, Southern Highlands) can be country rural areas improved

= High barrier = Medium barrier = Low barrier Source: Dalberg stakeholder interviews, Tanzania Cotton to Clothing Strategy (2016-2020), World Bank 24 “Ease of Doing Business” Report (2019), Dalberg Garments Industry in Ethiopia Report (2017) Tanzania will need to decrease costs of electricity and water to be competitive 1A regionally to attract foreign investments for global exports

Tanzania Kenya Ethiopia Recommendations Variable Costs Labor costs USD 60-70/month USD 110-150/month USD 50-60/month • With higher labor costs than Ethiopia, Tanzania workers can be better trained to have higher productivity Electricity costs1 USD 0.1/kWh USD 0.1/kWh USD 0.02-0.04/kWh • Tanzania’s electricity costs can be lowered to match that of Ethiopia through a power subsidy • Power supply stability should be improved, especially as upstream activities (e.g. fabric mills) will require consistent power supply Water costs1 USD 0.89/m3 USD 0.62/m3 USD 0.12/m3 • Tanzania’s water cost can be lowered to match those of Kenya and Ethiopia, particularly with fabric manufacturing Import customs costs2 USD 1725 USD 948 USD 870 • Tanzania’s import border compliance cost (USD 1350) need to be significantly reduced 40 FT container factory to USD 850-2000 USD 885 USD 1590 • Transport costs could be lowered if existing port costs railways are able to transport cargo Export clearance costs2 USD 1435 USD 334 USD 347 • Tanzania’s export border compliance cost (USD 1160) need to be reduced 40 FT shipping costs3 US: USD 1500-2500 US: USD 1500-2500 US: USD 1300-1800 NA EU: USD 2000-2400 EU: USD 1800-2200 EU: USD 1300-1800

= High barrier = Medium barrier = Low barrier Note: 1. Electricity and water unit costs are values before VAT exemption. 2. Import and export costs include border and documentary compliance costs. They are sourced from the “Ease of Doing Business” Report, and may be adjusted for garment/textile imports and exports. 3. Shipping costs are provided by shipping companies Source: Dalberg stakeholder interviews, Tanzania Cotton to Clothing Strategy (2016-2020), World Bank “Ease of Doing Business” Report (2019), Dalberg Garments Industry in Ethiopia Report (2017), Addis Ababa Water and 25 Sewage Authority, Nairobi Water and Sewage Company Factory construction costs in Tanzania are 43% higher than Ethiopia because 1A Ethiopia builds factory sheds for potential investors

Tanzania – costs of investing in a 500k pieces/month Ethiopia – costs of investing in a 500k pieces/month capacity garment factory, USD capacity garment factory, USD

3,000,000 3,000,000

2,500,000 2,500,000

1,260,000 225

2,000,000 2,000,000

1,500,000 1,500,000 1,260,000 0

1,000,000 930,000 1,000,000

500,000 500,000

0 0 0 Construction Machinery Land Lease Construction Machinery Land lease

TADB can set up a fund to invest in building factory sheds across strategic EPZAs or upgrade existing unused factories into potential EPZA sites for investors

Note: All costs above are given by manufacturers and adjusted accordingly to the calculated capacity. China and US are used as illustrative import (raw materials) and export (end products) destinations. 26 Source: Dalberg interviews Operating costs in Tanzania are 28% higher than in Ethiopia, primarily driven by 1A high electricity costs, followed by import customs and shipping costs to the US

Tanzania – costs of investing in a 500k pieces/month Ethiopia – costs of investing in a 500k pieces/month capacity garment factory, USD capacity garment factory, USD 1,800,000 741,700 1,850 1,200 2,960 7,400 1,700,000

1,600,000

1,500,000

1,400,000

1,300,000 271,000 310 1,590 720 5,700 1,200,000

1,100,000

1,000,000 60,000 55,000 894,000 894,000 900,000

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000 3,225 5,930 9,000 1,200 1,000 5,630 4,480 1,590 0 Rent Shipping Import Port to Raw Labor ElectricityWater Factor Export Shipping Rent Shipping Import Port to Raw Labor ElectricityWater Factor Export Shipping from customs factory material y to clearance to US from customs factory material y to clearance to US China port China port Current investments in infrastructure projects will likely reduce the cost of electricity in the country. In the interim, a power tariff subsidy would help improve Tanzania’s competitiveness Note: All costs above are given by manufacturers and adjusted accordingly to the calculated capacity. China and US are used as illustrative import (raw materials) and export (end products) destinations. 27 Source: Dalberg interviews Tanzania will also need to improve labor productivity and reduce custom costs 1A to be competitive regionally to attract foreign investments for global exports Tanzania Kenya Ethiopia Recommendations Speed Labor unit productivity1 20 T-shirts/day 25 T-shirts/day 20 T-shirts/day • Tanzania can provide a fund to support all Although similar to manufacturers to conduct training before or regional levels, global while investments are made (e.g. scale standards are at 42 T- National Skills Development Programme) shirts/day • Tanzania can ease barriers to accessing foreign trainers required for training Import customs days2 27 10 11 • Tanzania’s import border (240 hours) and documentary (402 hours) hours need to be significantly reduced Export clearance days2 8 1.5 5 • Tanzania’s export border and documentary hours (both at 96 hours) need to be significantly reduced Shipping days3 US: c. 42 days US: c. 42 days US: c. 32 days NA EU: c. 30 days EU: c. 27 days EU: c. 20 days Stability Finance fluidity & FOREX Medium Medium-High Low • Banks can lower collateral requirements for working capital and other financing Lending rates 18% 14-18% 8.5% • Banks can lower lending rates, possibly through deploying development capital Country stability High Medium Low • The Government can capitalize on Tanzania’s high stability to attract investors

Note: 1.= HighT-shirt barrier production is used= Medium as a garment barrier example to compare= Low barrier productivities across countries. 2. Import and export days include border and documentary compliance time. They are sourced from the “Ease of Doing Business” Report, and may be adjusted for garment/textile imports and exports. 3. Shipping days are provided by shipping companies. Source: Dalberg stakeholder interviews, Tanzania Cotton to Clothing Strategy (2016- 2020), World Bank “Ease of Doing Business” Report (2019), Dalberg Garments Industry in Ethiopia Report 28 (2017) Labor productivity accounts for the binding constraint in determining entry 1A and expanding investments within a country

CHALLENGES CASE STUDY: NATIONAL SKILLS DEVELOPMENT PROGRAMME Labor productivity has become a binding • • The National Skills Development Programme (2015-2021) is a constraint for existing foreign and domestic program under the Prime Minister’s Office – Labour, Youth, garment and textiles manufacturers Employment and Persons with disabilities aimed to improve the skills • First, there is a lack of trained workers, largely and knowledge of the national workforce to cope with competitive impacting garment manufacturing. In garment landscapes in local and international markets manufacturing, labor productivity in Tanzania • To achieve set objectives, the program focused on increasing the is on 50%-60% of global average availability of skilled labor for garment manufacturing. PMO entered • Second, there is a lack of expertise for into an MOU with various Garment Manufacturers and provided daily technical roles which contribute to the allowances to laborers while garment manufacturers invested in majority of positions in textiles processing. For training. technical roles, it has become increasingly • To date, the government has disbursed a total of TZS 330 million to difficult for expatriates with skilled expertise 1000 trainee workers at Tanzania Tooku Garment Company Limited, to obtain work permits in Tanzania as daily allowances in the first 3 months of initial training. This • Currently, VETA supervisors are not well- provided some relief to the recipient company, primarily trained and hence cannot properly train their students. VETA equipment is also too POTENTIAL SOLUTION obsolete, resulting in students needing to learn from scratch when they start work at a factory • Tanzania can either set up a TZS 6-8 billion fund to support training of 20,000 garment workers for 5 new or existing investors interested • It can take up to 2 years to train their staff in expanding garment manufacturing for export markets, similar to and bringing productivity levels up. Skills the National Skills Development Programme Development Levy (SDL) Fund paid for by manufacturers has not been effectively used to • Alternatively, Tanzania can set up a TZS 240 million fund that upskill labor for the industry supports the training of 200 supervisors who in turn can train 20,000 workers. On average, one manager would supervise 50-100 factory workers 29 Source: Dalberg stakeholder interviews Tanzania’s political stability and easier access to FOREX could make it a more 1A ideal long-term investment destination versus Ethiopia

Tanzania Ethiopia Tanzania Premium % Political risk – short-term 4 6 33% (on a scale of 1-7, 1=lowest, 7=highest) • Likelihood of a risk caused by political and assimilated events, e.g. political unrest, natural disaster, connected to cross-border transactions with a risk horizon of up to 1 year Political risk – medium/long 5 6 17% term Likelihood of a risk caused by political and assimilated events, e.g. political unrest, natural (on a scale of 1-7, 1=lowest, • disaster, connected to cross-border transactions with a risk horizon beyond 1 year 7=highest) Commercial risk Above average Average NA (on a scale of 1-7, 1=lowest, Exporttransactions Commercial factors that affect the payment capacity of all debtors/obligors in a country include 7=highest) • currency depreciation, high interest rates, an economic recession, widespread corruption etc. Political violence risk 4 6 33% (on a scale of 1-7, 1=lowest, Political violence refers to a concept broader than ‘war’ and include i) ‘terrorism’ and ii) political 7=highest) • violence damage. Acts of both internal and external conflicts and conflict potential are taken into consideration Expropriation and government 5 5 0% action risk Expropriation risk encompasses all discriminatory measures taken by a host government which (on a scale of 1-7, 1=lowest, • deprive the investor of its investment without any adequate compensation, e.g. events of 7=highest) embargo, change of regime Currency inconvertibility and 5 6 17%

Direct investments Direct transfer restriction risk The currency inconvertibility and transfer restriction risk refers to the inability to convert and (on a scale of 1-7, 1=lowest, • transfer out of the host country any funds related to the investment 7=highest)

= High barrier = Medium barrier 30 Source: Credendo Credit Insurance Group Further, Tanzania will need to provide comparative incentives to local investors 1A similar to those provided to investors in EPZAs

OVERVIEW

• There is 1 large investor manufacturing higher-quality garments for global markets. Another player currently exports to Europe, they export comparatively smaller volumes of garments that fetch lower prices • Local investors tend to use a 60%-40% strategy in entering into global markets, 60% of their production is sold in export markets and 40% in local and regional markets • Tanzania will need to provide comparative incentives to investors outside EPZAs, including the current incentives (tax breaks on imports) as well as the proposed incentives (e.g. labor productivity fund)

Expand existing incentives provided to foreign Introduce additional incentives for both foreign and investors to local investors outside EPZAs local investors*

• Tanzania can expand existing incentives provided • Premises: Tanzania can open up plug and play to investors outside EPZAs. Currently, very few premises for investors through upgrading existing local investors access EPZAs and many are likely to unused factories and investing in new buildings shift their existing manufacturing sites for export • Power tariff subsidy: In addition to keeping markets. This includes opening up existing existing VAT exempt on utilities, Tanzania can offer incentives available to investors outside EPZAs, a power tariff subsidy to lower the cost of including: electricity • Tax incentives: EPZA can provide a tax relief on • Labor productivity: Tanzania can open up a fund capital goods and raw materials imported by for foreign and local investors interested in local manufacturers exporting outside EPZA expanding garment manufacturing for high-end • Power consistency: Tanzania can improve export markets power consistency to non-EPZA investors

* These recommendations have been discussed in the previous section 31 Source: Dalberg stakeholder interviews B INCENTIVIZE INTEGRATION INTO THE LOCAL VALUE CHAIN IN THE LONG RUN In the long term, garment manufacturers can pursue vertical integration by 1B investing in their own or outsourcing to existing fabric or yarn processors

1 VERTICAL INTEGRATION 2 VERTICAL INTEGRATION VIA SOURCING WITHIN ONE COMPANY FROM A STANDALONE SUPPLIER

Company A Company A Company B Company C garment Garment Garment Garment manufacturer manufacturer manufacturer manufacturer

Company A Company A Company B Company C fabric processor Fabric processor Fabric processor Fabric processor

Company A Yarn processor(s) yarn processor

Yarn processors of either model will source local cotton from domestic ginners and farmers. In order to achieve this goal, Tanzania will need to improve the quality of cotton produced

33 Source: Dalberg interviews Efforts to improve quality of cotton will be necessary for vertical integration; 2B although farmers have access to the right seed variety, poor harvesting techniques and the type of machinery used reduce cotton length Factors Impact on quality of cotton Current efforts in Tanzania Seed variety Seed variety is the base determinant on the quality of Tanzania uses UKM08 which optimizes the strength and cotton, which is determined by Micronaire (MIC) a resistance of cotton fibers. UKM08 falls within the long measure that assesses fiber strength and maturity. A range of cotton seed variety. Tanzania is looking to introduce tensile strength above 26 grams/tensile is favored an optional seed variety, UK173, which has better crop resistance and yield, but lower fiber length than UKM08 Climatic Rainfall influences length and quality of cotton. The Drip irrigation is necessary for optimal planting, however, conditions ideal rainfall for cotton production is 50mm-100mm. there is minimal irrigation used in the production of cotton in Too much water result in solidification of water on Tanzania. There are multiple irrigation schemes in the Lake plants Zone that are under-developed or under-utilized Harvest and Poor harvesting and post-harvesting techniques Farmers use poor harvesting and post-harvesting post-harvest reduce cotton quality. Use of combined harvesting techniques. Farmers use combined harvesting and also mix techniques techniques over hand-picking as well as pre-mature stones and sand to cotton to add to the weight at which a bag harvesting can damage cotton quality of cotton is sold Ginning The type of ginning machinery used reduce the quality Ginners in Tanzania have switched to the use of saw machinery and length of cotton. Rollers pulled seeds causing machines over rollers to improve efficiency and reduce cost limited damage to the length of the fiber. Saw machines of ginning. Given current market conditions, ginners do not are used for improved efficiency, however, damage have incentive to switch back to the use of rollers cotton fiber Spinning Spinning machinery impacts the fineness of yarn made. Investments spinning machinery in Tanzania is only relevant machinery Newer technology have the ability to produce finer yarn when there is a ready market for yarn. There mixed capacity than outdated technology. Technology transformation among spinners, and may require 2-3 buyers/investors in has made spinning preparatory step critical for the fabric or garment manufacturing for the economics to work quality and economy of outgoing products in the textile industry

Key: This table highlights the importance of key determinants in the quality of cotton as well as current efforts to improve these determinants Source: Effect of Cotton Fibers and Their Trash Characteristics on the Performance of Spinning Preparatory 34 Processes (2016); What is a Micronaire in Cotton, and Why Does it Matter? (2015); Dalberg Interviews Blending cotton can improve cotton fiber length and smoothness; improvements 2B in harvesting techniques will be vital

• The process of blending or mixing cotton helps improve overall length and smoothness of yarn produced. Optimal smoothness of yarn needs to be above 20s and can go up to 45 Ne, depending on type of product. The difference in fiber length to be used for blending cotton is only 2mm. Higher differences between fiber length increases defect • There are limitations of blending current Tanzanian cotton to help improve length and smoothness of yarn for global markets. Although Tanzania’s seed variety can produce long length cotton (32mm), current agronomic practices reduce fiber length to medium length cotton (often 28mm or lower). As a result, Tanzanian cotton can only blended at maximum 30mm. • As agricultural practices improve, the length of cotton will improve which will open up opportunities to blend with higher length cotton from neighboring countries, such as Uganda and , who produce cotton with 30-32mm length. In the long-term, GAP will need to improve significantly to achieve optimal length of the current seed variety which produces long-length cotton

Short-term Long term Quality of Tanzania Properties blending blending Yarn current opportunities opportunities Count Range Smoothness of yarn: Count range below 20s Ne would not be Below 20s Ne 20s – 32s 33s – 45s (Ne) sufficient for apparel garments or bedsheets for global markets Fiber length Natural length of fiber: Long staple cotton is an important factor in 26-27mm 28-30mm 30-32mm manufacturing at high count ranges Micronaire Air permeability of compressed fiber: value determines if there is 4-4.6 3.6-4.2 3.5-3.8 adequate fineness and maturity. Higher micronaires is associated with more processing waste, knots, lower spinning performance, dye appearance and eventual quality of yarn/fabric. Strength Gram per tensile: this is the force that can be applied to the fiber 24-27 27-30 29-31 without it breaking. This is important as the thread is exposed to strenuous forces during the manufacturing process. Maturity Degree of fiber wall thickness: Immature fibers result in low dye 0.85 0.84 0.84 uptake, increased fiber breakage, fabric defects, and waste

35 2 MANUFACTURING TO EXPAND INTO REGIONAL AND LOCAL MARKETS The demand for finished garments and fabrics is high in local and regional markets, 2 however, suppliers are unable to compete with cheap imports

MARKET COMPETITIVE LANDSCAPE • The market size for garments in Tanzania is Importers are dominant players in the approximately ~73,000 MT today. The population supply of finished garments in both local has been growing by 3.1% annually and is expected and regional markets. Manufacturers to double by 2050 from the current 53 million supplying garments - 21st century, Sunflag, and A to Z - sell ~40% of products in the • Tanzania has access to both the East African Community (EAC) and the Southern African local markets and 60% in either regional or Development Community (SADC). It enjoys near global markets free trade agreements with member states, resulting in access to more than 470 million Local consumers prefer imported finished consumers. Currently, South Africa is the second garments from China, due to price despite biggest importer of Tanzania apparel exports lower quality products that last ~1 year. Compared to Chinese imports, second-hand clothing had comparatively lower impact on the demand and supply of garments. According to garment manufacturers, there is stiff competition from low-cost Chinese Tanzania products than second-hand clothing. SADC member Regional markets also face the same influx • Market statesaccess will further increase if Tanzania of competitive garments and fabric from joins The Common Market for Eastern and China Southern Africa (COMESA), which comprises of over 460 million consumers

Source: Tanzania Invest; SADC Joint Meeting of Ministers of Energy and For Water Held Statement May 2019, Southern African Development Community; About EAC (2017), East Africa Community; Dalberg 37 interviews There are various pain-points along the value chain that reduce the 2 competitiveness of finished garments and fabrics in regional and local markets

Cross-cutting challenges Fabric processing Garment manufacturing

A • Fluctuation of global prices impacts The productivity of producing fabric is • The current quality of cotton B predictability of local price and higher in China compared to Tanzania, limits access to higher-end ultimately, the economics of the yarn resulting in lower prices buyers in regional and Middle and textile industry. Government East markets, as well as in • Inefficient and outdated local intervention in setting higher prices of opening up opportunities for in technology reduces productivity, vertical integration with garment farmers impact local industries increases cost of producing garments, manufacturers targeting higher • Lower valuation of imported fabric and decreases quality of fabric and end global markets in the long- result in traders paying lower taxes and garments term ultimately, in lower-priced imported • High power tariffs and inconsistency products in the local markets. With of power can highly influence fabric lower costs of production than Tanzania, manufacturing. First, high tariffs drive China has a cost advantage that is up production costs. Second, further exacerbated for garment inconsistency of power breaks down manufacturers due to lower taxes the machine which impacts the • Tanzania is reliant on imported non- machine cotton inputs (e.g. dyes, chemicals, • Poor access to water results in high polyester), which ultimately increases production costs. Traditional fabric cost of production compared to China use a lot of dye (15-20 grams of dye who produce most non-cotton inputs per meter) • Poor local infrastructure leads to higher transport cost of transporting raw Given manufacturers take a 60%-40% approach to materials to fabric manufacturing as markets, investments in improving fabric processing well as final products to markets than in technology and tariffs can be delayed until there is an China opportunity to expand products in local markets or regional buyers are secured 38 Source: Dalberg interviews Globally, countries have tried different measures for curbing fluctuating 2A cotton price information to protect farmers and support growth of local industries

PRICE- BASED DIRECT INCOME COMMODITY RISK SCHEMES SUPPORT PROGRAMS MANAGEMENT TOOLS

• The scheme offers farmers a • Provide support (subsidy) to cotton • This is a market-based solution that minimum price to protect farmers growers, without linking them to facilitates actors impacted by price through government subsidies production decisions (farmers and ginners) to rely on hedging to protect themselves from • These schemes are easier to • The subsidy is provided as a function administer than other programs of land ownership, historical yields, price volatility and budgetary allocations. It This has limited burden on the • United States, China, Turkey, Brazil • incentivizes farmers to produce crops and Egypt have used this model Government with the highest market value Risks: • This scheme is used in Mexico (cotton) • European Union, Mexico, and the and Guatemala (coffee) • The scheme is costly and United States have used this model Risks: unsustainable, given it puts the full Risks: burden of price variability on • This solution requires (i) competitive government • It is difficult to define eligibility based well-functioning local markets (ii) on informal land ownership transparent prices, (iii) high skill • Farmers have limited incentive to levels, and (iv) high infrastructure respond to market signals • The scheme can be costly, but not higher than price-based schemes investments

• Tanzania hasn’t implemented a price- • There aren’t any specific programs in • Tanzania is currently designing the based cash subsidy program. The Tanzania focused on providing direct Tanzania Mercantile Exchange (TMX), Government provided subsidy in the support to farmers which will be able to offer commodity form of seeds and pesticides this year risk management instruments to incentivize farmers

39 Source: Managing Price Volatility in Egypt (2001) Case Study: China provides a price-based subsidy and a transportation subsidy for cotton farmers, specifically in Xinjiang

CHALLENGE SOLUTION • China’s labor cost has been rising at a • In 2014, the Chinese Government introduced target-price subsidy specifically for double-digit rates over the last decade; the Xinjiang region. The Government set an indicative price and then committed to hence driving production cost up while paying the difference in price when the market price is lower than the indicated shrinking farmer’s profit margin price. The subsidy has two core components: – The government only changes the indicative price every three years. The • Xinjiang produces 67% of China’s current indicated price is RMB 18,600 per tonne ($2,704/t) cotton. As a result, the welfare of – There is a specified quota of 16.4 million tons, 85% of average annual Xinjiang’s 19 million people state, is production for 2012-2014 highly susceptible to the fluctuating cotton global price. In addition, there is • The 2014 subsidy is complemented by other supporting subsidies that apply to increased friction and Xinjiang farmers. Non-Xinjiang farmers receive a stipend of RMB 2,000 ($285/t) underdevelopment of the Xinjiang for every tonne farmers sell region – $150 million total in transport subsidies provided specifically to Xinjiang farmers to transport cotton from the Western region to Eastern region where • Initially, the government addressed processors are located this issue of price fluctuations through – $2-$3 billion total machinery subsidy is provided to all farmers to aid a stock acquisition program. As a result mechanization in agriculture. The Xinjiang region benefits from this, given large- of lower market prices, the Government scale farming requires the most mechanization had 11 million tons of unsold cotton in 2011/12. Today, there are 8 million tons IMPACT of unsold cotton stockpiled in • Chinese government has eliminated warehousing cost associated with the stock government warehouses. Between acquisition program. With the new program, the Government is not liable to keep 2009-2013 domestic consumption of stock of unsold cotton cotton declined by 29%; thus increasing China reserve of unsold cotton • Xinjiang farmers have a guaranteed stable income as the new target-price subsidy has set a floor price for farmers hence cushioning them from plummeting prices of cotton in global market

USDA, Cotton policy in China, 2015, Asia Nikkei, China cotton growers fear cuts in vital subsidies, 2017, FAOSTAT, China: Seed cotton, production quantity (tons), 2019, Reuters, China rejigs cotton policy for 40 top grower Xinjiang, 2017 In the short-term, the Government could introduce a subsidy, similar to the model 2A used in China, to address fluctuating local cotton prices

SHORT-TERM CASE STUDY • The Government of Tanzania can introduce a subsidy program to stabilize cotton prices for both farmers and ginners for the next ~5 years

• The Government can set an indicative price for raw cotton in Tanzania. When global prices slump, ginners pay farmers the lower price and Government subsidizes the difference. When global prices rise above the indicative price, ginners competitively bid to buy cotton. The Government will need to commit to not changing the indicative price of cotton for a period of 3 years to maintain stability in the market

• This subsidy can be paid for by the Government via a specific fund set by the Government or existing pools of funding linked to reducing imports (e.g., import levy on garments)

LONG-TERM • In the long-term, the Tanzania Mercantile Exchange can provide stability by developing financial instruments that can enable farmers and ginners to hedge against price fluctuations. Tanzania will have to invest in improving the: (i) competitiveness of local markets, (ii) transparency of cotton prices, (iii) skill levels for managing TMX, and (iv) infrastructure investments

Source: Asian Review, China Cotton Growers Fear Cuts in Vital Subsidies (2017); Reuters, China 41 rejigs cotton policy for top grower Xinjiang (2017) ANNEX PRODUCT MAPPING FOR GLOBAL MARKETS Tanzania is best positioned to manufacture knit t-shirts, knit women’s suits and packaging bags for global markets

Products Market size Growth Complexity and inputs Supplier landscape Investment opportunity (MT) rate required Knit T-shirts 2.5M MT 3.5% • Complexity: Low Top suppliers: China High – Knit t-shirts are considered a • Inputs: 100% cotton (18%), Bangladesh basic/semi-complex product that are or a blend with (15%), Turkey (7.9%), relatively easy to produce. Existing polyester (e.g. 80% India (6.5%), manufacturers in Tanzania are currently cotton, 20% polyester) Germany (4.2%) producing knit-tshirts for local and regional markets Knit 1.34M MT 5.5% • Complexity: Medium Top suppliers: China Medium – Suits in general require more women’s • Inputs: 100% cotton (36%), Vietnam advanced skills from workers than T-shirts. suits or a blend with (8.5%), Bangladesh Investment are required for upskilling the polyester (e.g. 60% (6.5%), Cambodia available workforce and high quality cotton cotton, 40% polyester) (5.2%), Turkey (4.8%) fabric that may need to be initially imported or 100% polyester, accessories Packing 0.6M MT (all 15.4% • Complexity: Low Top suppliers: China Medium – The growth of demand for bags types of • Inputs: 100% cotton (26%), India (23%), packing bags is significant, although the bags) or a blend with Vietnam (13%), Italy demand for cotton-based packing bags polyester (5.5%), Pakistan remain relatively small. This could be an 29,986 MT (3.7%) opportunity to tap into local, regional and (for cotton global markets, particularly given Tanzania’s = Low packing= Medium bags = High new position of banning plastic bags only)

Note: High complexity means inputs mix and production processes are most sophisticated. Medium complexity means inputs mix and production processes are relatively sophisticated. Low complexity means inputs mix and production processes are least sophisticated. High investment opportunity means there is an immediate investment opportunity (year 1-3). Medium investment opportunity means there is an investment opportunity in the medium term (year 3-5). Low investment opportunity means there is an investment opportunity in the long term (year 5+). 44 Source: MIT Atlas, Tridge, Dalberg stakeholder interviews The markets for awnings, tents, curtains and non-knit men suits are small, complex to manufacture, or require significant non-cotton inputs

Market size Growth Complexity and inputs Supplier landscape Investment opportunity (MT) rate required Awnings, 0.8M MT 4.4% • Complexity: Medium Top suppliers: China Medium – There demand for awnings tents and • Inputs: blend of cotton, (50%), Germany and tents is small, but shows a small sails nylon, acrylic coating (5.9%), Bangladesh positive growth trend. Limited cotton is (5.7%), United required in manufacturing awning and States (2.8%), tents so more investment is needed in Poland (2.5%) non-cotton inputs, e.g. nylon, acrylic, coating, etc. Curtains 0.5M MT -3.1% • Complexity: Low Top suppliers: India Medium – Curtains made from synthetic • Inputs: 100% cotton or a (27%), China (24%), or blended fibers hold more than 90% of blend with polyester (e.g. Pakistan the global market. The market value for 55% polyester, 45% (15%),Indonesia woven cotton curtains is 39,023 MT. cotton) or 100% (4.6%) Turkey Local firms are best positioned to polyester (3.5%), compete in that segment due to existing weaving capacity Non-knit 1.3M MT 0.7% • Complexity: Medium Top suppliers: China Low – Suits in general require more men’s suits • Inputs: 100% cotton or a (23%), Bangladesh advanced skills from workers than T- blend with polyester (e.g. (14%), Vietnam shirts while non-knit products require 60% cotton, 40% (6.1%), Italy (4.8%), higher investment costs in machinery polyester) or 100% Turkey (4.8%) and quality of cotton used polyester, accessories = Low = Medium = High

Note: High complexity means inputs mix and production processes are most sophisticated. Medium complexity means inputs mix and production processes are relatively sophisticated. Low complexity means inputs mix and production processes are least sophisticated. High investment opportunity means there is an immediate investment opportunity (year 1-3). Medium investment opportunity means there is an investment opportunity in the medium term (year 3-5). Low investment opportunity means there is an investment opportunity in the long term (year 5+). 45 Source: MIT Atlas, Tridge, Dalberg stakeholder interviews Similarly, the markets for non-knit women suits, knit sweaters, and organic products is small, shrinking or complex to manufacture

Market size Growth Complexity and inputs Supplier landscape Investment opportunity (MT) rate required Non-knit 1.9M MT 2.9% • Complexity: Medium Top suppliers: China • Low – Suits in general require more women’s • Inputs: 100% cotton or a (37%), Bangladesh advanced skills from workers than T- suits blend with polyester (7.3%), Turkey (5.4%), shirts while non-knit products (e.g. 60% cotton, 40% Italy (5.1%), Vietnam require higher investment costs in polyester) or 100% (5.0%) machinery and quality of cotton used polyester, accessories

Knit 2.4M MT -10% • Complexity: Medium Top suppliers: China • Low – The market size for knit sweaters • Inputs: 100% cotton or a (37%), Bangladesh sweaters is declining at an average blend with polyester (8.9%), Vietnam (6.8%), rate of 10%. The opportunity for (e.g. 60% cotton 40% Turkey (4.3%), investment is also low due to polyester) Cambodia (4.1%) considerable amount of skill required from workers

Organic 600,000 MT 7% • Complexity and inputs There are two • Low - Markets for organic cotton cotton depend on type of producers of certified products are evenly split between products products organic cotton in US and Europe (Germany and Tanzania. However, Switzerland mostly). The market is there are no small, but growing. Complexity of manufacturers of organic products depends on types organic based products of products manufactured

= Low = Medium = High Note: High complexity means inputs mix and production processes are most sophisticated. Medium complexity means inputs mix and production processes are relatively sophisticated. Low complexity means inputs mix and production processes are least sophisticated. High investment opportunity means there is an immediate investment opportunity (year 1-3). Medium investment opportunity means there is an investment opportunity in the medium term (year 3-5). Low investment opportunity means there is an investment opportunity in the long term (year 5+). 46 Source: MIT Atlas, Tridge, Dalberg stakeholder interviews PRODUCT MAPPING FOR REGIONAL AND LOCAL MARKETS Traditional fabrics: While traditional fabrics form the bulk of domestic cotton products, cheap imports and size of the market weaken opportunities for new investments Products Local market size Growt Complexity and inputs Supplier landscape Investment opportunity (MT) h rate required 756 MT 3.1%* • Complexity: Low • Local: Majority of • Medium: Although there is a Estimated based • Input: Bleached cotton batik production is small market locally, there is a local production of fabric, dye and done by fragmented strong regional market with tie and dye white chemicals small-scale good quality perceptions of fabric producers/artisans Tanzanian-made fabric. Limited • Imports: China can mechanization due to level of produce printed batik, detail achieved through manual however, limited process. Market linkages supply support is needed for existing batik suppliers Khanga and 5,750 MT 3.1%* • Complexity: Low • Imports from China • Low: Saturated market, kitenge Estimated demand • Input: 100% cotton, dominate the consumers have limited ability from population dyes, chemicals traditional fabric to differentiate Tanzanian vs. market capturing Chinese kitenge, resulting in approximately 57% of selecting cheaper fabric. demand Tanzanian kitenge is of poorer • Local: 21st century, quality than kitenge within the Sunflag, NIDA, region Mwatex and Urafiki Kikoi 220 MT 3.1%* Complexity: Medium Low: Local market limited to • Textiles. Sunflag is the • Estimated demand Input: Cotton/acrylic tourists and coastal regions • only kikoi producer = Low from= Medium population = High blends; dye, chemicals Note: High complexity means inputs mix and production processes are most sophisticated. Medium complexity means inputs mix and production processes are relatively sophisticated. Low complexity means inputs mix and production processes are least sophisticated. High investment opportunity means there is an immediate investment opportunity (year 1-3). Medium investment opportunity means there is an investment opportunity in the medium term (year 3-5). Low investment opportunity means there is an investment opportunity in the long term (year 5+). *The market growth rate of traditional fabric is linked to Tanzania’s population growth. Source: World Bank; Tanzania Human Development Report, UNDP; World Population Review; National 48 Bureau of Statistics; Easy Travel; Dalberg interviews and estimates Finished garments and interior dressings: There is some opportunity to tap into the households market for bed linens, however, it is highly fragmented

Products Local market Growth Complexity and Supplier landscape Investment opportunity size (MT) rate inputs required Bed linens 5,728 MT 3.1%* • Complexity: • Local: Sunflag, • Medium: The medical industry procures bed linens Estimated Low NIDA,Urafiki,21st from local producers through Medical Stores demand from • Inputs: 100% century, Department (MSD). Hotels and lodges often import population cotton, tetron, Handmade in white bed linens for higher quality and size dye, chemicals Tanzania, Afritex limitation of bed linens from local producers. There • Imports: China, may be an opportunity to tap into households S. Africa, Pakistan market which is fragmented Uniforms 22,000 MT 3.1%* • Complexity: • Local: 21st • Low: High participation of local fabric and garment Estimated Low Century, Sunflag, manufacturers in two subsegments (schools and based on • Input: 100% A to Z armed forces) despite competition from imports. student, cotton or • Imports: China, Other market sub-segments, such as hospitality industry blended fabrics India sector, require significant customization. Mining workers, others and construction industry is small segment and can be catered by existing producers Window 3,700 MT 3.1%* • Complexity: • Imports: China, • Low: There is high demand for synthetic, heavier dressings Estimated Low for cotton Canada, Turkey window dressing among large buyers, including (cotton) demand from window corporates, hospitals, etc. The use of window population, dressings dressings among households is limited to middle- aligned with • Inputs:, cotton, income and high-income households. Synthetic import dyes, chemicals window dressings require more complex raw numbers materials and processes Note: High complexity means inputs mix and production processes are most sophisticated. Medium complexity means inputs mix and production processes are relatively sophisticated. Low complexity means inputs mix and = Low = Medium = High production processes are least sophisticated. High investment opportunity means there is an immediate investment opportunity (year 1-3). Medium investment opportunity means there is an investment opportunity in the medium term (year 3-5). Low investment opportunity means there is an investment opportunity in the long term (year 5+). *The market growth rate of traditional fabric is linked to Tanzania’s population growth. Source: World Bank; 2012 Census Report; PWC 2018-2022 Hotels Outlook – Tanzania; Tanzania Human Development Report, UNDP; World Population Review; Labor Market Profile (2018); UNESCO Institute for 49 Statistics; Dalberg interviews Pharmaceutical and hygiene products: These products require organic or sanitized cotton; the market is growing and currently highly reliant on imports

Products Local market Growth rate Complexity and Supplier landscape Investment opportunity size (MT) inputs required Hygiene Pads 9,350 MT • 3.58% • Complexity: • Local: Malkia High: There is political will and incentives Based on import Medium Investments to attract investors to produce sanitary values and • Inputs required: • Imports: China, pads and similar products locally. The current Non-Woven South Africa, Egypt, country currently has 2 certified production Organic Cotton Mozambique ginneries producing organic cotton lint levels that can be used for producing hygienic pads. Machinery used in India is low-cost and can be leveraged to target low-end local markets Hospital 682 MT • -8.29% • Complexity: High • Imports: China, Low: Although MSD alone can procure cotton-based Based on MSD • Inputs required: Kenya, Pakistan, 150MT, the investment opportunity is products procurement Processed Cotton India and Uganda too small with limited growth prospects. (cotton wool, capacity and These products are also complex to bandages and import values produce gauze) = Low = Medium = High

Note: High complexity means inputs mix and production processes are most sophisticated. Medium complexity means inputs mix and production processes are relatively sophisticated. Low complexity means inputs mix and production processes are least sophisticated. High investment opportunity means there is an immediate investment opportunity (year 1-3). Medium investment opportunity means there is an investment opportunity in the medium term (year 3-5). Low investment opportunity means there is an investment opportunity in the long term (year 5+). *The market growth rate of traditional fabric is linked to Tanzania’s 50 population growth. Source: ITC Trademap; Dalberg estimates and interviews POTENTIAL STRUCTURE OF SUBSIDY PROGRAM FOR COTTON FARMERS An import levy on cotton fabric and garments can cover the cost of the subsidy 2A for farmers

TSHS. 2019 2020 2021 2022 2023 2024 2025 2026 Import levy revenue Import value 2,645,000,000 2,773,000,000 2,907,000,000 3,048,000,000 3,170,000,000 3,297,000,000 3,170,000,000 3,497,000,000 Expected growth rate n/a 4.84% 4.84% 4.84% 4% 4% 3% 3% of imports2 Import levy1 25% 25% 25% 25% 25% 25% 25% 25% Import levy revenue 661,000,000 693,000,000 727,000,000 762,000,000 792,000,000 824,000,000 849,000,000 874,000,000 (per year) Subsidy breakdown Cotton production 400,000 696,000 1,212,000 1,999,000 3,299,000 5,443,000 6,531,000 7,838,000 (MT) Expected growth rate 74% 74% 74% 65% 65% 65% 20% 20% of production3 Harvest price 1,400 1,400 1,400 1,400 850 850 850 2,000 Predicted indicative 1,000 1,000 1,100 1,100 1,100 1,100 1,100 1,200 prices4 Difference in price 400 400 300 300 (250) (250) (250) 800 Total subsidy cost 0 0 0 0 (825,000,000) (1,361,000,000) (1,633,000,000) 0 Cumulative income 661,000,000 1,090,000,000 1,381,000,000 1,590,000,000 1,747,000,00 1,234,000,000 1,234,000,000 476,000,000 (60% retained) 1

5 AssumptionsBalance after subsidy 661,000,000 1,090,000,000 1,381,000,000 1,590,000,000 922,000,000 386,000,000 (398,000,000) 78,000,000 1 The common levy placed on imports from East African Communities. We are assuming that this import rate will stay the same (or likely to increase) over a period of 10 years. 60% of the revenue from import levy is retained for the next year if it is not used to subsidize farmers. During the year, revenue from the levy is used to subsidize farmers, the remainder budget is retained for the next year 2 Imports are likely to decline over the next 5-10 years due to stiff competition from local producers 3 For the first 5 years, the expected growth of production remains at the current 74%, after which it drops to 65% for two years and 20% for the last four years 4 The indicative price of cotton increases every 3 years, not yearly, based on production costs and global price trends 5 In the year, the revenue does not cover the cost of the subsidy, a loan from TADB can cover the balance. The loan can be re-payed the year when the revenue is higher than the subsidy All units have been rounded to the nearest 100,000 or 1000

52 Source: MIT Atlas; Bank of Tanzania; Dalberg Interviews & Assumptions