October 2005

This publication was produced for review by the United States Agency for International Development. It was prepared by Community Partnerships for Sustainable Resource Management (COMPASS II) staff.

ENHANCING ECONOMIC OPPORTUNITIES

PROMOTING BUSINESS LINKAGES, PARTNERSHIPS, AND MULTIPLIER EFFECTS FOR COMMUNITIES IN THE HONEY,

MUSHROOM & AQUACULTURE SECTORS IN MALAWI

OCCASIONAL PAPER NO. 16 COMMUNITY PARTNERSHIPS FOR SUSTAINABLE RESOURCE

MANAGEMENT (COMPASS II)

May 2006

This publication was produced for review by the United States Agency for International Development. It was prepared by Bagie Sherchand, Development Alternatives, Inc.

AUTHORITY Prepared for the Government of Malawi and for USAID/Malawi under Contract Number 690-C-00-04- 00090-00 awarded 30 April 2004, entitled Community Partnerships for Sustainable Resource Management in Malawi (COMPASS II). The views expressed and opinions contained in this report are those of the author and are not intended as statements of policy of the Government of Malawi, USAID or the contractor companies.

PREPARED BY:

COMMUNITY PARTNERSHIPS FOR SUSTAINABLE RESOURCE MANAGEMENT IN MALAŴI (COMPASS II)

AUTHOR: BAGIE SHERCHAND

CREDITS: Cover photos: Bagie Sherchand, John Dickinson and Levy Manda. Text editing and report layout & design by John Dickinson and Todd Johnson

COMPASS II IMPLEMENTING PARTNERS:

Development Alternatives, Inc Private Bag 20, 1st floor Able House 7600 Wisconsin Ave., Suite 200 #8 Hannover Ave at Chilembwe Road Bethesda, MD 20814 Blantyre USA Malawi

Tel: +1-301-771-7600 Telephone: +265 (0)1-822-800 Fax: +1-301-718-7968 Fax: +265 (0)1 822 852 email: [email protected] email: [email protected]

With: Wildlife & Environmental Society of Malawi (WESM) +265-1-643-502 Private Bag 578, Limbe, Malawi

Spectrum Media +1-617-491-4300 271 Willow Ave., Somerville MA 02144 USA

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II III

IV MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

ENHANCING ECONOMIC OPPORTUNITIES PROMOTING BUSINESS LINKAGES, PARTNERSHIPS, AND MULTIPLIER EFFECTS FOR COMMUNITIES IN THE HONEY, MUSHROOM & AQUACULTURE SECTORS OF MALAWI

DISCLAIMER The views expressed in this publication do not necessarily reflect the views of the Government of Malawi, the United States Agency for International Development or the United States Government.

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II V

CONTENTS

CONTENTS ...... VII TABLES: ...... IX FIGURES: ...... IX ACRONYMS ...... X PREFACE ...... XI EXECUTIVE SUMMARY ...... XIII 1. INTRODUCTION...... 1 1.1. OBJECTIVES...... 2 1.2. METHODOLOGY:...... 3 1.3. ORGANIZATION OF REPORT:...... 3 2. SUBSECTOR SELECTION RATIONALE ...... 5 3. THE HONEY SUBSECTOR...... 7 3.1. HONEY SUBSECTOR CONSTRAINTS AND CHALLENGES...... 8 3.2. AREAS FOR STRATEGIC IMPROVEMENT IN THE HONEY SUBSECTOR ...... 10 3.3. COMMERCIALLY VIABLE OPTIONS AND BUSINESS OPPORTUNITIES...... 12 Commercially Viable Options and Opportunities...... 13 3.4. INNOVATIVE PARTNERSHIP MODELS...... 15 Smallholder Commercialization Framework...... 15 Smallholder Honey Improvement Program ...... 17 Smallholder Beeswax Commercialization Program...... 17 4. THE WILD MUSHROOM SUBSECTOR...... 19 4.1. MUSHROOM SUBSECTOR CONSTRAINTS AND CHALLENGES...... 20 4.2. AREAS FOR STRATEGIC IMPROVEMENT IN THE MUSHROOM SUBSECTOR ...... 22 4.3. COMMERCIALLY VIABLE OPTIONS AND BUSINESS OPPORTUNITIES...... 23 Commercially Viable Options and Opportunities...... 24 4.4. INNOVATIVE PARTNERSHIP MODELS...... 25 PGE Mobilization for Linkage...... 26 Smallholder Mushroom Cultivation and Commercialization ...... 26 5. THE AQUACULTURE SUBSECTOR...... 27 5.1. AQUACULTURE SUBSECTOR CONSTRAINTS AND OPPORTUNITIES ...... 29 5.2. AREAS FOR STRATEGIC IMPROVEMENT IN THE AQUACULTURE SUBSECTOR ...... 30 5.3. COMMERCIALLY VIABLE OPTIONS AND BUSINESS OPPORTUNITIES...... 32 Cage Fishing...... 32 Fingerling Production ...... 33 Floating Pellets (Fish-Feed) Production ...... 34 Ice Making Plant Establishment ...... 34 5.4. INNOVATIVE PARTNERSHIP MODELS...... 36 Smallholder – MALDECO Alliance...... 36 Smallholder - Shoprite Collaboration...... 38

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II VII

6. PILOT LOCATIONS ...... 39 6.1. NYIKA, MZIMBA ...... 39 6.2. NKHOTAKOTA...... 39 6.3. CHINGALI, ZOMBA...... 40 6.4. MULTIPLIER EFFECTS ...... 40 7. INVESTOR INTEREST IN THE NATURAL RESOURCES-BASED ENTERPRISE SECTOR ...... 41 ANNEXES...... 43 ANNEX 1: REFERENCES ...... 45 ANNEX 2: PERSONS CONSULTED...... 47

VIII MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

TABLES: Table 1: Constraints and challenges facing the honey value chain...... 9 Table 2: Strategies for improvement in the honey value chain...... 10 Table 3: Constraints and challenges confronting the wild mushroom value chain...... 21 Table 4: Strategies for improvement in the wild mushroom value chain ...... 22 Table 5: Constraints and challenges facing the aquaculture value chain...... 29 Table 6: Strategies for improvement in the aquaculture value chain...... 31 Table 7: Backward and forward linkages...... 40

FIGURES: Figure 1: Malawi Honey Subsector Map 7 Figure 2: Smallholder Commercialization Model 16 Figure 3: Malawi Wild Mushroom Subsector Map 19 Figure 4: Malawi Aquaculture Subsector Map 28

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II IX

ACRONYMS BVC Beach Village Committee CBNRM Community Based Natural Resources Management CFR Cost and Freight CODEX Codex Alimentarius (Food Code) COMPASS Community Partnerships for Sustainable Resources Management in Malawi EPL Eco-Products Limited EU European Union FAO Food and Agriculture Organization of the United Nations g. gramme Kg Kilogramme ISO International Standards Organization IFFA Integrated Fish Farming Association m. metre ME Middle East MOU Memorandum of Understanding NGO Nongovernmental Organization PET Poly-Ethylene Terephthalate PGE Producer Group Enterprise PTC People’s Trading Company SCFT Smallholder Coffee Farmers Trust UNDP United Nations Development Program UNOPS United Nations Office of Project Services USAID United Stated Agency for International Development WHO World Health Organization

X MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

PREFACE Development Alternatives Inc. (DAI) was contracted by the United States Agency for International Development (USAID)/Malawi to implement the second phase of the Community Partnerships for Sustainable Resource Management (COMPASS II) under Contract # 690-C-00-04-00090-00. USAID and DAI signed the contract on April 30, 2004 with effective dates of May 1, 2004 to March 31, 2009. The contract engages DAI and its implementing partners1 to assist USAID/Malawi in achieving progress toward the Strategic Objective of sustainable increases in rural income, and specifically the Intermediate Result of household revenue from community-based natural resources management activities increased. The purpose of COMPASS II is to enhance household revenue from participation in community-based natural resource management (CBNRM) initiatives that generate income as well as provide incentives for sustainable resource use in Malawi. This is part of a strategy to mainstream community-based management of natural resources within a transformational development framework that progresses toward eventual graduation from developmental foreign aid, one of the USAID global operational goals for broad-based prosperity in stable, democratic countries such as Malawi. Building on solid foundations from previous investments by USAID and others of increased capacity among Malawian government and nongovernmental organizations to adopt strategies that ensure long-term economic and environmental sustainability, COMPASS II seek to accomplish three objectives: 1. To increase the decentralization of natural resource management, 2. To enhance rural communities' capacity to sustainably manage their natural resources, and 3. To increase sales of natural resource-based products by rural households. Achievement of progress toward these objectives requires a multi-faceted approach toward devolving authority and responsibility to manage natural resources to field levels, facilitating the acquisition of skills and tools to dispatch that authority responsibly, and profiting from sustainable utilization of those natural resources as an incentive to manage the natural capital assets sustainably. One way that the COMPASS II implementation team is working toward achieving these objectives is to build awareness among a wide range of CBNRM stakeholders about the opportunities that improved management of natural resources by communities could provide toward economic growth in Malawi. The CBNRM Occasional Paper series makes better information more widely available, highlighting some of the evolution in thinking among CBNRM practitioners in Malawi and throughout southern Africa. The series is intended to provide up-to-date information about various aspects of CBNRM, and promote wider discussions about the different approaches to field practice. It is hoped that by providing current information to audiences that may not otherwise have access to technical reports, and by stimulating discussions, practitioners in the region and beyond may be able to contribute to further improvements. This document is the 16th in the Occasional Paper series. It reports on an assessment of how business partnerships in Malawi might be encouraged and enhanced for rural clients operating natural resource- based enterprises. The results verified that the potential for profitable linkage with enterprises in rural districts is very high, and that there remain critical challenges to overcome. Recommendations for forging these partnerships focus on the use of market forces to stimulate producers to coalesce and consolidate their fragmented production systems to achieve marketable quality and volumes. Please feel free to send comments on this title in the Occasional Paper series, or request additional copies, through the COMPASS II offices in Blantyre, or by email to [email protected].

Todd R. Johnson Sr. CBNRM Specialist and COMPASS II Chief of Party Development Alternatives, Inc.

1 Wildlife & Environmental Society of Malawi and Spectrum Media

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II XI

XII MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

EXECUTIVE SUMMARY This assessment was commissioned by the USAID funded Community Partnership for Sustainable Resource Management (COMPASS) II activity in Malawi. The study assessed the honey, mushroom and aquaculture sub-sectors, which have been identified by COMPASS II as three sub-sectors with strong potential to contribute significantly to the overall COMPASS II mandate: Employment generation, income expansion, and sound natural resource management. Previous analyses conducted under COMPASS II indicate that all three sub-sectors engage large numbers of Malawi’s rural population and all have fairly well functioning supply chains. However, there is widespread recognition that these supply chains could be further improved to reduce transaction costs, increase value-chain efficiency, enhance competitiveness, and encourage more investments in order to absorb additional production in response to market demand. There is also growing concern that while these supply chains are operational, opportunities for small- holders and communities to participate in more economically meaningful ways in the natural resource based products sector are dwindling or becoming marginalized as the resources they utilize are either declining or disappearing. In addition to receding resources, Malawi’s smallholders and communities living in proximity to natural resources have been unable to participate more inclusively in the formal supply channels due to various constraints, contradictions and cultural practices. Therefore the imperative is to develop strategies that build on these communities’ strengths and integrate their participation in value chains to improve livelihood options and increase household revenue that have more promise of achieving long-term sustainability in both economic and environmental terms. This assignment responds to these needs by first identifying opportunities that promote the integration of smallholders and communities in the natural-resources-based value-chains to participate not only as suppliers, but also as partners adding value, while encouraging effective utilization practices that create economic incentives for conservation of natural resources. This study also offers several innovative partnership models, between natural resource based communities and the private sector, as an approach to commercially link users or producers to markets. For example, several “business-to-community” partnership models for each sub-sector were developed and packaged for pilot testing. The Smallholder– Maldeco Alliance, the Shoprite–Smallholder collaboration, the smallholder honey and beeswax commercialization program, and the smallholder producer group enterprise linkage with wild mushroom exporters in the mushroom sub-sector are some examples of business-based partnerships proposed for implementation. Several locations, all within COMPASS II coverage, also have been identified for piloting some of the proposed models. For example Mzimba and Rumphi Districts are being proposed for honey and mushroom; Nkhotakota for fish (both pond and cage aquaculture), mushroom and honey; and Chingali near Zomba for pond aquaculture. In addition to innovative partnership models, the study further assessed areas for strategic improvement in order to help increase value chain efficiency and competitiveness. Several appropriate and pragmatic solutions were developed to address the various constraints identified in the report. For example, in the honey sub-sector, the quality of packaging material or lack thereof is a serious problem. The recommendation is to move away from PVC jars to PET-based jars in affordable sizes to better display product while being tamper proof. Consumer friendly pricing strategy and product differentiation are examples of some of the recommendations offered, not only to increase consumption, but also to safeguard product quality and integrity based on nectar source to create variety and lower average production cost. The wild mushroom sub-sector’s highly atomistic, underdeveloped and fragmented marketing system calls for serious improvement if its potential is to be harnessed in a manner that maximizes benefits for the smallholders. Atomistic production and fragmented marketing presents some of the biggest challenges because it results in intense competition among a multitude of small operators with even smaller volumes, preventing among other things, consolidation and bulking to produce commercial volumes that can be marketed for a meaningful return. Consequently, everybody remains subsistent. Organizing producer marketing groups to take advantage of the number of pickers/producers to build sufficient volume and lower transaction costs is one strategy that is being recommended in this report. Successful producer

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II XIII

groups have the potential of not only increasing marketing efficiency and effectiveness but also in the process have the possibility of minimizing exploitation of smallholders by unscrupulous intermediaries. The areas of strategic improvements within the aquaculture sub-sector mostly focus on the demand side. There are a number of initiatives and activities providing supply-side support, which is critical for development and expansion of the sub-sector. That said, some of the most binding constraints holding down the growth of aquaculture are first the lack of a market-driven approach, and second, an absence of a framework that promotes smallholder commercialization. It is therefore vital that improvements on the market and marketing side of the equation be intensified equally if not more so, to enable smallholders to exploit the opportunity created by the present deficit in fish supply. The study also offers several commercially viable enterprise options to help exploit opportunities in the natural resource based products sectors. Based on preliminary financial analyses, enterprise options such as cage fishing, floating pellet (fish feed) production, fingerling production, mini ice-plants, mushroom cultivation, honey sticks and sachet production, and beeswax works, are examples of commercially viable ventures utilizing appropriate technology and most suitable for smallholders and their associations. Some of the enterprise options present prospects for investment by potential investors. A total of 12 enterprise options across the three sub-sectors are presented in the report. For those options that are taken up for expansion by the private sector, it is recommended that full-fledged financial feasibility analyses be conducted to determine more precisely enterprise profitability and performance.

XIV MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

1. INTRODUCTION This assessment was commissioned by the USAID Community Partnership for Sustainable Resource Management (COMPASS) II activity in Malawi and was carried out in two phases: Phase I was conducted over a two week period in June 2005; phase II was conducted over three weeks, between March – April 2006. The purpose of COMPASS II (USAID/Malawi; 2004-2009) is to enhance household revenue from participation in community-based natural resource management (CBNRM) initiatives that generate income as well as provide incentives for sustainable resource use in Malawi. To achieve these goals, COMPASS II seeks to accomplish three objectives: 1. to increase the decentralization of natural resource management; 2. to enhance rural communities’ capacity to sustainably manage their natural resources; and 3. to increase sales of natural resource-based products by rural households. Progress toward achieving these objectives requires a multi-faceted approach involving devolving authority to manage natural resources to the community levels; facilitating the acquisition of skills to dispatch that authority responsibly; and profiting from sustainable utilization of those natural resources. COMPASS II is expanding sales of natural resources products by identifying commodities that have the greatest potential to generate employment, increase household income and support sound natural resource management. COMPASS has identified honey and fisheries as two subsectors with potential to contribute to its objectives. Accordingly three analyses have been conducted: two focusing on honey2 and the third on Ncheni fisheries3 in Nkhata Bay of Lake Malawi. A subsector mapping of aquaculture was also recently completed as part of COMPASS’ business services needs assessment. In addition, a rapid assessment of the wild mushroom subsector, which provides a short seasonal economic opportunity to many smallholders, was also conducted as part of this assignment. These analyses indicate that honey, mushroom and fish engage a large number of Malawi’s rural population and all have fairly well-functioning supply chains. But more importantly, these analyses indicate that markets exist for all three products since domestic production does not sufficiently meet demand. However, there is widespread recognition that the supply chains for these products could be further improved to reduce transaction costs, increase value chain efficiency, enhance competitiveness and encourage more investments in order to absorb additional production in response to market demand. There is also growing concern that while these supply chains are operational, opportunities for smallholders and communities to participate in more economically meaningful ways are dwindling or becoming marginalized as the resources they utilize are either declining or disappearing. In addition to dwindling resources, Malawi’s smallholders and communities living in proximity to natural resources have been unable to participate more inclusively in the formal supply channels due to various constraints, contradictions and cultural practices. Their continual struggle to sufficiently gain from enterprise or trade has been aggravated by such important factors as their inability to organize sufficient volume, improve yield and product quality to meet market demand or to coordinate among themselves to trade beyond their local rural markets given the remoteness of many such communities and natural resources-based enterprises. Moreover, because of distance, poverty, and lack of access to appropriate and timely information, smallholders have tended to bank on informal trade, exposing themselves to unnecessary risk and falling prey to opportunistic “foot loose” traders, who purchase without regard to quality or method of production. For example, in the case of mushroom and honey, smallholders participate in great numbers, but they are viewed more as “foragers” who merely gather poor quality raw products. There is reluctance

2 COMPASS II Occasional Paper No. 10, July 2005: Addressing the Business Services Needs for Rural Natural Resources- Based Enterprises in Malawi. USAID, Malawi and Kadale Consultants, February, 2005. Honey Sub-sector Analysis: Initial Report for COMPASS II. Blantyre, Malawi. 3 COMPASS II Occasional Paper No. 4, March 2005: Decentralization and Fisheries. USAID, Malawi.

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II INTRODUCTION 1

among some formal businesses to consider smallholders as “partners” capable of contributing to quality and adding value along the supply-chain. Perceived as purveyors of lower-end products who do not view their activities as “serious” enterprise, smallholders have been consistently disadvantaged, resulting in their failure to ascend to a level of operation which encourages adoption of better technologies or enables the development of products either in volume or value. With little or no support systems (weak or missing marketing systems and poor or non-existent infrastructure) in place, smallholders and communities have continued to suffer poor terms of trade under which sales at very low prices and capricious relationships with traders turn out to be disincentives. Consequently, in Malawi, families and communities living around natural resources have been left on their own, in terms of establishing formal relationships and linkages with legitimate businesses and processors to meet the nation’s demand for natural resource based products. Such peripheral participation of small- holders and communities in the natural resource based value chains have fed the cycle of low return, lower investment and increasing disregard for natural resources, resulting in even more feeble participation. This sort of vicious cycle has further perpetuated their inability, whether perceived or real, to contribute meaningfully to value chain competitiveness and success. The impact of exclusion from formal value chains and markets is sustained poverty and threatened natural resources. The challenge presently facing this sector, therefore, is the development of those market solutions that stimulate growth while supporting natural resources conservation. Strategies that build on these communities’ strengths and integrate their participation in the process to improve livelihood options and increase household revenue have more promise of achieving long-term sustainability in both economic and environmental terms. This assignment responds to the need stated above by first identifying opportunities that promote the integration of smallholders and communities in the natural resources-based value chains to participate not only as suppliers, but also as partners adding value, while encouraging effective utilization practices that create economic incentives for conservation of natural resources. Successful integration of small- holders and communities in commercial value chains bundled with the introduction of value- added activities have the clearest prospect for increasing income and multiplier effects to the levels that could stimulate high levels of participation and production by the communities. The premise is that smallholder participation in the value chains will enable them to not only get stable returns from their production but also improve product quality, increase productivity, and enhance their marketing capabilities. Furthermore, when smallholders and their enterprises are partners in a value chain, working in close collaboration with commercial businesses, the possibility of improving value chain efficiency is also considerable. However, it must be noted that the basic challenge facing the natural resources sector is finding ways to successfully link producers to markets, particularly since Malawi’s natural resources-based industry is very thin and natural resources-based businesses are conservative and risk-averse. Being mindful of this challenge, this report presents several innovative partnership models. It also recommends a framework to start the process for successful integration and building partnerships with the natural resources based private sector. Since all three value chains covered by this assignment have considerable room for improvement, several commercially viable options and opportunities were identified to help increase value chain efficiency and competitiveness. Some of these options present prospects for investment for potential investors. For those options that are taken up for expansion by the private sector, a quick economic feasibility should be conducted.

1.1. OBJECTIVES The overall purpose of this assignment is to design commercially viable mechanisms and innovative partnerships to bring investors and communities closer together, working as partners in their respective value chains. In the process, the assignment also looked at developing a better understanding of potential investor interest, or lack thereof, in natural resources-based products sector. Once implemented, these

2 INTRODUCTION MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

commercially-driven partnerships have the potential of not only empowering communities and enhancing larger businesses, but in the process can also enable rural producer/natural resource-user group owned enterprises to be the driver of economic revival in rural areas. This assignment follows at the heels of two COMPASS II studies concluded in March and July 2005. These two analyses provide the basic platform for launching this assignment, since it builds on the findings and conclusions of these studies. However, while the analyses identified several constraints and limitations that hinder subsector growth and competitiveness and outline various opportunities that could potentially contribute to increased income, there is still need to further assess the subsectors to develop appropriate, pragmatic and commercially viable solutions that address the identified constraints and exploit opportunities. This assignment, therefore, focuses on assessing these two value chains plus one on wild mushrooms to identify areas for strategic improvement leading to reduced transaction costs, risks and uncertainty, or enhanced product quality and profitability. The assignment also examines key points of leverage to further expand options and enhance opportunities to improve supply chain coordination through brokering commercial partnerships between natural resource-based communities and the private sector. The ultimate aim of this assignment is to contribute to conservation of natural resources through increased profitability and competitiveness of the targeted natural resources-based product value chains. In addition, several “business-to-community” partnership models are developed and packaged for pilot testing and possible promotion in select locations, all within COMPASS II coverage. Several locations are recommended for piloting some of the models, for example the forests around the Chikangawa area for honey and mushroom, Nkhotakota for honey, mushroom and fish (both pond and cage fishing), and Chingali near Zomba for pond aquaculture.

1.2. METHODOLOGY: The COMPASS II studies on honey and fish provided the starting point for this assignment, offering pertinent information on the targeted subsectors. The assignment primarily relied on field visits and on- the-ground discussions and interviews with natural resources-based product producers, producers associations, businesses and key trade associations already engaged in production, marketing and exportation of natural resource based products in designated areas. In collaboration with the COMPASS II Enterprise Development team, the consultant met and discussed with other intermediaries and service providers such as transporters, distributors, retailers, wholesalers and potential buyers of natural resource- based products, where applicable. Meetings were also held with key individuals in relevant departments and units of public sector institutions, and international donors. The assignment started with meetings and interviews with key market players such as Shoprite, MALDECO, Eco Products Ltd (EPL), Tambala Foods, Chiwogoro Apiaries, Peoples Trading Company, Nali Foods, Chanterella Pvt. Ltd., and the Smallholder Coffee Farmers Trust (SCFT) to get an understanding of market demand, trends and buyer behavior. These interviews provided anecdotal evidence about how the three commodities are faring in the domestic market. The meetings also provided some useful information on the major constraints that challenge processors and buyers. Meetings with smallholders, producer clubs and associations were also held in several districts covered programmatically by COMPASS II. It is remarkable to observe how rural communities are coping and dealing with rural market failure and how they are making the most with very little. Results from all these interviews, discussions, consultations and interactions were analyzed and used as the basis of this report.

1.3. ORGANIZATION OF REPORT: The report is organized as follows: The introduction is followed by a section on the rationale driving selection of the subsectors under consideration. Section three on honey presents an overview of the subsector, identifies the constraints and opportunities, followed by a review of areas for strategic improvement in the honey value chain. This section also presents several commercially viable options and business opportunities that could be further developed for potential investment. This section closes

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II INTRODUCTION 3

with a discussion on and presentation of innovative partnership models packaged for implementation and designed with the intention of assuring positive impact and sustainability. The honey section is followed by discussions focusing on mushroom and aquaculture. Both mushroom and aquaculture sections follow the outline utilized to review and discuss the honey subsector. Pilot sites to demonstrate the viability of the economic opportunities, business linkages and innovative partnerships recommended under the three subsector analyses are then presented after the discussion on aquaculture. The report closes with a brief assessment of the constraints and challenges facing the natural resource based products sector, to secure a clearer understanding of investor interest or lack thereof.

4 INTRODUCTION MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

2. SUBSECTOR SELECTION RATIONALE The three subsectors targeted for this assignment, honey, mushroom, and aquaculture were selected primarily because of their potential to meet the overall COMPASS II mandate which is employment generation, income expansion and sound natural resource management. In addition to the project defined parameters, these subsectors also were identified because they all play on the strengths of the smallholders and capitalize on their comparative advantage: labor and land. Moreover, given the nature of these commodities, adding value and processing a higher quality product do not require sophisticated technologies or heavy capital investment. These characteristics make all three commodities “smallholder- friendly,” as they offer opportunities for small scale producers and communities to venture into more commercial processing through on-farm or near-farm-gate value-adding activities. Value-addition to primary production can contribute to faster income and employment growth. Another key feature of these subsectors is that they already engage large numbers of smallholders living in villages or communities near natural resources. These traditional social groupings and clustering of households in village settings offer the opportunity to more easily and efficiently organize households and communities into out-grower schemes or similar market-oriented organizational arrangement to gain from economies of scale and lower transaction costs. This is a significant advantage in its own right since working with large numbers of dispersed, unorganized producers and rural entrepreneurs to consistently deliver a uniform product can be difficult, time consuming and costly. Out-grower schemes and similar partnership models provide the framework for establishing linkages between smallholder groups or communities and growth-oriented commercial businesses who seek to enhance their supply volume and competitiveness in the marketplace. Even in the natural resources sector, such mechanisms provide the opportunity to expand production, increase productivity and maximize benefits to participating smallholders, associations and their communities, while encouraging conservation and better stewardship of natural resources. But sustained success will be elusive if the producers and processors are not market-oriented. The tendency in most cases is to produce a commodity year after year and hope they can sell it for the best price possible. Yet it is common knowledge that only those products with strong demand and growing markets have the best prospects for continued success. Fortunately, all three commodities identified by COMPASS II are fairly proven products with strong unmet demand in the domestic market, which show high potential for growth and have ready markets. A survey conducted by COMPASS in 2005, for example, shows that wholesale purchases of honey in 2005 increased by 13 %. The same report also indicates that Malawi’s honey production and sales are on the rise domestically. Internationally too, the demand for natural honey is relatively strong. For example, in 2004, the EU imported about € 289 million worth of natural honey (149,000 MT) from developing countries, primarily China, Argentina, Mexico and Brazil4. Zambia and Tanzania are two African countries that have also been successfully exporting in bulk to the EU market. For mushroom, the processors tell us that the international demand for Malawi’s wild mushrooms is far from being met. Given the superior quality of African wild mushroom, it is highly sought after in international markets. In the last two years, exports of, particularly, wild mushrooms (porcini and chanterelle) have risen by approximately 150 %. But exporters continue to worry that domestic demand will deplete production leaving little for export due to the limited nature of the product5. Malawi’s wild mushrooms are exported in dried form, primarily to the EU food-ingredients market either directly or by way of South Africa. The EU imports of dried mushrooms from developing countries, destined for the food-ingredients sector, have also been increasing. In 2003 for example, Eurostat data6

4 CBI, October 2005. EU Market Survey 2005: Food Ingredients for Industrial Use. The Netherlands. 5 Field interview, April 2006, Mzuzu, Malawi. 6 CBI, August 2005. EU Market Survey 2005: Preserved Fruits and Vegetables. The Netherlands.

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II SUBSECTOR RATIONALE 5

indicate that EU imported approximately 14,000 MT of dried mushrooms from developing countries. Dried mushrooms are most commonly used for soup mixes. In the case of aquaculture and fish, the domestic demand remains strong particularly in those districts far from Lakes Malawi and Malombe. Even though fish is a major part of the traditional diet and an important source of protein, fish consumption in the country has declined over the years mainly due to the depletion of fish resources in Lakes Malawi, Malombe and Chilwa, which has resulted in declining fish landings. FAO statistics7 indicate that Malawians at present are consuming only about 3.6 Kg. per person annually (2001 data) compared to the WHO recommended minimum per capita consumption of 13 to 15 Kg. The shortage of fish, Chambo in particular, has therefore become a national concern in Malawi. Consequently, aquaculture is being viewed strongly by many as the next best way to satisfy this pressing domestic demand. Growing markets and the possibilities of a healthy return on investment are primary incentives for investors and prospective entrepreneurs to exploit opportunities through increased enterprise. These three subsectors clearly possess some key conditions necessary to stimulate economic expansion, profit- making and success. What is now required is to help build further confidence in the business community that natural resource based enterprises can be good investment opportunities. The following sections present for consideration several potential strategies, options and opportunities in the three subsectors to help make the operating environment more conducive for the private sector.

7FAO, April 2005. Fishery Country Profile: Malawi. Rome, Italy.

6 SUBSECTOR RATIONALE MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

3. THE HONEY SUBSECTOR Malawi’s honey subsector is dominated by approximately 15 major processors (2004), five of whom are also commercial-scale beekeepers. These five represent 30% of Malawi’s honey production; in 2005 this was projected to increase to 38% of the country’s total output1. However, a large percentage of honey produced in Malawi continues to be collectively supplied by smallholders. From among these, an estimated 2,500 are typically organized around clubs or groups of about 15 to 20 members, with each member producing an average of about 10 Kg. for the formal market1. There is also another group of 5,000 to 8,000 informal beekeepers who produces an average of about 3 to 5 Kg. per beekeeper for home consumption and/or for sale to rural households within their own immediate communities. By recent count, the northern region of Malawi alone had an estimated 3,000 beekeepers8. Despite the large number of producers, Malawi’s honey production remains relatively small compared to other neighboring countries such as Zambia, for example. In 2004, Malawi’s overall production was estimated at 70 to 75 MT compared to approximately 400 MT for Zambia. While projections for Malawi for 2005 were 13% higher (about 82 MT) and estimates for 2006 were also on the rise, the nation’s honey production volume nevertheless remains comparatively small. Malawian honey is largely consumed domestically given that, according to one honey processor, demand remains unsatisfied. Consequently, only a marginal volume occasionally slips through to regional markets, for example Mozambique and South Africa1. Currently, per the 2005 COMPASS II honey report, domestic commercial production is only meeting a third of the total estimated demand of 220 MT. Malawian honey is presently marketed mainly through four different channels. A honey subsector map1 (Figure 1) charts the flow from production to consumer in this sector. As noted in Figure 1, honey in Malawi is sold in three principle markets: rural and urban households purchased through informal markets; formal retail channel such as supermarkets; and bulk sale to institutional buyers such as hotels, pharmaceutical companies and hospitals (honey in Malawi is highly valued for its medicinal properties).

Figure 1: Malawi Honey Subsector Map Bulk Honey Informal/ Formal Hospitals, Pharmaceutical International Rural Households Markets Urban Households & Hotels

Supermarkets/Shops Retail processors Private Associations Wholesale Producers Commercial

Processing/ Packaging

Bulk Wholesale Collectors Collection

N=<1000 Producers Small Organised clubs Clubs without Harvesting with contract arranged contract arrangements sales Production

Input Suppliers Associations and NGOs Local Shops and Individuals

Channel 1 Channel 2 Channel 3 Channel 4 Small-scale Channels Contract Processors Spot Buying Processors Commercial Beekeepers Beekeepers In all these markets, smallholders play a central role as key suppliers. As mentioned above, smallholders in Malawi contribute to approximately 70% of the country’s total honey production. However, despite their dominant role, a large percentage of smallholder honey is processed downstream by private

8 Shelix Munthali, September 2005. Consultations with Beekeepers and Honey Processors in Northern Malawi.

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II HONEY SUBSECTOR 7

processors and commercial producers who also buy from smallholders to bulk-up their supply for further processing. Smallholders generally supply raw honey either directly to private processors under contract, who provide an assured market, or through traders, collectors and spot processors, who buy from a central location. These buyers and processors generally tend to prefer improving quality and adding value themselves, on their own premises. Increasingly though, smallholder associations and beekeepers clubs are beginning to join forces to collect and add value to member-produced raw honey for sale in various processed-honey markets in an attempt to increase household income and provide a guaranteed market. The SCFT is a good example of such a group with special links to its producers, and also enjoys a fairly sizable domestic market share (15 % in 2004). The SCFT is owned by Malawi’s 3,100 smallholder coffee producers, who also produce honey as an added income-generating activity. Like SCFT, there are some commercial processors who are attempting to establish a “relationship” with their suppliers (smallholder honey producers), one that builds on strong ties and long-term partnership. A handful of those like EPL and Chiwogoro Apiaries go beyond simply providing a guaranteed market; they work with smallholders to build producer capability to produce high quality Malawi Gold Standard honey, pay top prices for top quality and invest in training smallholders to begin producing a value-added product. In this framework, both producer and processor are driven by mutual interest and benefit. However, very few supplier-buyer relationships in Malawi follow this operational philosophy. The nature of current demand and therefore the competition for honey has set off a trading practice that is increasingly calling for on-the-spot cash payment. In the short-term, this trend of paying cash on demand has made it progressively more difficult for many processors and traders to either develop any kind of loyal relationship or insist on quality-based pricing3. As a result, raw honey price has steadied at about MK 150 per Kg. across the country, which translates to roughly US$ 1.1 per Kg. Early in 2006, the international price hovered at about US$ 1.1 per Kg. landed (CFR, U.S. East coast) for bulk, light-amber conventional honey. Malawians complain about the high price of honey in the local market. A recent market survey9 shows that both consumers and retailers (supermarkets and shop managers) view Malawian honey to be expensive. But they continue to demand the product because honey is regarded highly for its perceived medicinal properties and traditional use. Picking up on this national sentiment, the industry’s pricing strategy appears to be one of implicitly placing honey in the luxury or specialty good segment, not for everyday consumption, even though honey is a strong substitute for syrup, jams, jellies, and sugar. Malawians, being cost-conscious, have responded accordingly, which explains the slow pace of retail sales in supermarkets and regular stores. The same survey also emphasizes this point: 90% of the 557 individuals interviewed said they liked honey, but only 34% bought the product on a regular basis. Such statistics reveal that the honey industry appear to have failed in understanding that local consumer buying behavior is not always about taste and tradition; it’s also sometimes about the consumers’ level of dissatisfaction with the product. The industry ought to listen.

3.1. HONEY SUBSECTOR CONSTRAINTS AND CHALLENGES So what factors restrain the honey industry from responding to market signals? What elements negatively draw-down on the honey value chain efficiency? What are some areas that could be capitalized to further propel subsector growth and competitiveness? Poor quality of product, inadequate supply of quality raw honey, poor packaging, weak product differentiation, lack of product diversification and market segmentation, absence of proper technical information and poor infrastructure are examples of some external and internal constraints that contribute to high transaction costs and block profitability. External factors such as poor infrastructure and lack of access to affordable finance play their part at the macro level in inhibiting industry competitiveness and growth. Other factors such as issues of quality, packaging materials, standards compliance and forms of market organization/operations are constraints internal to the honey industry and many of these can be resolved with better coordination and collaboration at the industry and firm level.

9 Shelix Munthali & Temwa Munkhuwa, January 2006: Honey Retail and Industrial Market Investigations.

8 HONEY SUBSECTOR MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

This section focuses predominantly on those constraints and issues that are “internal” to firms and producers. The objective is to look at bottlenecks hindering productivity and profitability so as to intervene in the most critical leverage point that can yield high performance and positive change. The following table presents some key constraints that have been identified by most value chain participants (in this and other studies) as being the most critical and most important at weighing the industry down, and keeping them from achieving their goals and further contributing to the sector’s growth and development.

Table 1: Constraints and challenges facing the honey value chain

Value Chain Constraints and Challenges Function

• Low product quality primarily due to smallholders lack of understanding of quality • Low volume primarily due to low hive yield and limited beekeeping knowledge • Low yield due to lack of knowledge about proper bee pastures • Lack of appropriate & timely technical information on a variety of technical topics • Smallholders are insecure about access to bee pastures and safety of hives & honey Production • Affordability of modern hives & lack of access to finance a major issue for smallholders • Beekeeping viewed as subsistent activity; smallholder not operating apiaries as business • Smallholders lack technical, business, finance and management skills and techniques • Limited outreach services to villages by suppliers of input or services • Seasonal nature combined with low volume and quality leading to reduced income • Lack of technical training and information on when and how to harvest properly • Low product quality due to improper pressing and storage • Lack of modern and appropriate equipment and storage materials Harvesting • Low quality due to poor homogenization and blending of honey from different sources • Erroneous perception of honey as being just one product • Wastage of other possible by-products such as wax, propolis, bee venom that have markets. • Absence of proper organization to take advantage of scale • Smallholders not organized and managed to operate like a business. • Communities dispersed and unable to group sizeable volume leading to increased costs • Communication is unreliable and expensive Collection • Transport cost is high when available; transportation is unreliable • Lack technical and market information • On-the-spot cash basis not conducive for establishing loyalty or buying in large volume • High price of raw honey leading to high cost of production -- Pricing not related to quality • Low quality of raw honey with no established traceability leading to market access issues • Honey viewed as one product and blending continues at processor as well • Lack of modern technology and technical knowledge • Lack of, and unstable, linkages to reliable suppliers • Industry dominated by traditional beehives contributing to low yield and volume Consolidation and • Lack of access to trade finance at reasonable rates during peak buying season implies buying smaller volumes from smallholders thereby increasing unit costs. Processing • Lack of access to affordable finance to purchase other inputs requiring foreign currency • Poor roads combined with lack of suitably sized trucks increase the price of final products and makes competition with imports and substitutes more difficult. • Lack of quality and tamper-resistant packaging material negatively impact retail sale • Processors view each other as competitors thwarting industry collaboration & coordination • Lack of contract enforcement encouraging side selling by contract-producers

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II HONEY SUBSECTOR 9

Value Chain Constraints and Challenges Function

• Industry lacks vision and a strategy leading to industry working at odds • Lack of understanding of product differentiation, new product development & branding • High rejection rate by wholesalers and retailers result in low profitability • Weak marketing channels made worse by speculators and traders who add little value Marketing • Insufficient linkages to buyers; market is thin and slow—only a handful of key buyers • Lack of access to diverse markets due to rising barriers to entry because of stringent international regulations; lack of knowledge on international quality requirements or needs • Heavy dependence on donor assistance throughout the chain • Oblivious to world honey market trends, competition, and developments

3.2. AREAS FOR STRATEGIC IMPROVEMENT IN THE HONEY SUBSECTOR While Malawi is still a very marginal player in the regional honey market, with the right strategy it could move into the league of the major players like its neighbors. Currently, Zambia is one of the largest certified organic honey producers in Africa, and Tanzania is not far behind. Tanzania also is a leading African source of beeswax. However, to even aspire to be in the same league, Malawi must commit to serious strategic improvement in the subsector. As noted in earlier sections, Malawi’s honey subsector suffers from many “ills,” from lack of appreciation for quality, to trying to sell what is produced instead of producing what can be sold. This reluctance to heed market signals has been one of the biggest constraints confronting the industry. This has led to high prices, while quality has remained fairly unchanged. Consequently, sales in domestic supermarkets and shops have moved slowly. However, studies and surveys indicate that the consumer desire for honey exists, and that actually domestic demand remains significantly unmet. To succeed in meeting the domestic demand, the honey industry needs to come together and work as a unit to strategically address these challenges and opportunities. When the factors contributing to subsector inefficiencies and ineffectiveness leading to high price, low quality and lack of product differentiation are dealt with as an industry, significant gains can be made. Table 2 offers various strategies and ideas to address many of these constraints and challenges facing the honey value chain. The implementation of some or all of the suggested strategies can contribute to the industry’s competitiveness, profitability, and attractiveness to prospective entrepreneurs and investors.

Table 2: Strategies for improvement in the honey value chain

Value Chain Strategies for Value Chain Improvement Functions

• Improve and Safeguard Quality: Train beekeepers on all aspects of beekeeping, from pasture identification, to husbandry, quality control, harvesting, extraction and storage. Training should also focus on business and management skills. The Malawi Gold Standard package should contribute to producing consistency in production & quality, identified by same Seal of Quality • Increase Productivity and Volume: Increase access to larger number of high yielding modern hives to assure higher household revenue, thereby lowering pressure to seek uncompetitively higher per Production unit price, creating a higher-costing product downstream as is current reality. • Provide Training on Business and Management Skills: Train beekeepers and clubs or groups to think & operate like a business, maintaining records and budgets for better costs control. • Introduce Product Traceability: Establish a systems approach to tracking and monitoring honey from production, marketing and processing to safeguard product quality as well as to enhance system transparency. Export markets are increasingly making this a requirement.

10 HONEY SUBSECTOR MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

Value Chain Strategies for Value Chain Improvement Functions • Differentiate Product: Increase awareness among beekeepers about importance of not blending honey; train on importance of variety & upholding natural honey integrity based on nectar source e.g. Nyika honey, color, taste, texture, aroma and viscosity -world price based on these attributes. • Diversify Production: Introduce production and sale of wax and other by-products as options to lower average cost-of-production, expand revenue base and increase income. • Increase Access to Finance: Access to input credit for modern hives & kits to increase productivity, or access to equipment leasing opportunities to increase volume & quality. • Acquire Organic Certification: Obtaining organic certification for bee pastures and forest reserves is central to achieving premium export prices, and a better and healthier product. • Provide Training on harvesting skills to improve honey extraction and quality. • Producer Group Enterprise Formation: Increase competitiveness of markets by introducing honey producer marketing organization/group, this should lead to reducing not only marketing margins, but also risks arising from lack of competition at times of need. End result is the emergence of a more competitive marketing system and empowered producers. In addition, economy of scale is achieved resulting in further lowering transaction costs. Harvesting • Provide Training on Business and Management Skills: Train beekeepers and clubs or groups to think & operate like a business, maintaining records and budgets for better costs control. and • Access Improved Honey Extraction Technology: Move from hand presses to centrifugal techniques Collection to improve product quality and separate wax and bee excreta from final product. • Train on Quality Grading: Train on quality segregation and traceability as a way to monitor and guarantee product identity, safety and quality to meet buyer specifications. • Increase Linkages to Reliable Buyers: Promote and establish “relationship honey” program—a market linkage program that brings together beekeepers through their PGEs with large-scale processors, who have the ambition and drive to expand production and sale into regional as well as international markets, resulting in scaled production & lowered costs due to market pull. • Increase Processing Efficiency: Work with producers to help them add value at the producer level by increasing quality and volume so that downstream costs are lowered. • Improve Access to Appropriate Tools and Processing Technology: Continually update processing techniques and practices in order to increase quality, efficiency, and profits. Outdated technology can lower quality and raise cost, making product uncompetitive. • Differentiate Product: Continue to differentiate product, creating several varieties and grades of specialty and/or niche honey by separating honey based on production or pasture zone, nectar source (e.g. “Phunga,” which presents a honey with a unique, delicate profile akin to honeydew honey), taste, color, and organic certification for the higher-priced export markets. Blended honey should be produced to target the mass market segment domestically. Segregated poduction along Consolidation these lines will lower average production cost and increase profit margin. and • Product Diversification: another cost reduction approach is to diversify the revenue base by adding Processing wax and/or candle production activity; world market for wax is robust. By-products with markets are propolis and bee venom but these require more sophistication in processing. • Acquire ISO/CODEX Certification: Obtaining these certifications of food safety, quality-control and quality assurance are central to achieving premium export prices, a healthier product, and better managed forests. • Access to Mediation for Contract Enforcement: To discourage contract breach between beekeepers and processors, and prevent lengthy court battles and costs. • Conduct Competitiveness Benchmarking: Benchmarking oneself against competitors will allow the industry to examine how Malawi compares with others in the same target markets. Such exercise will help inject a sense of reality vis-à-vis impact of globalization & competition. • Develop Vision and Strategy for Industry: Industry needs to work together to develop a common understanding, vision and strategy to expand domestic as well as export markets. The industry needs to agree on standards, codes of practice, a country brand image, and on lobbying the government for assistance for example setting up quality control laboratories for analysis, or for Marketing assisting in gathering market intelligence where Malawian embassies can help gather information on markets, buyers, supplier, prices, trade regulations and business procedures in target market; or with resolving market access issues in target markets. • Improve Packaging material: Access better quality and type of packaging materials such as jars for

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II HONEY SUBSECTOR 11

Value Chain Strategies for Value Chain Improvement Functions retail sale. PET-based jars in affordable sizes better display product & are tamper-resistant and leak or spill-proof, ensuring food safety and convenience for both consumers and retailers. Take advantage of the duty-free status with Zambia for alternative source of packaging material. Upgrade product quality and packaging to internationally acceptable standards for retail & bulk. • Identify Market Segments: understand buyers, their choices and timing, and meet their needs in both domestic and export markets. Understand quantitative and qualitative aspects of market segment size, growth rate and trends. • Introduce Consumer-Friendly Pricing Strategy: Lower price, not just size, of blended honey to make it affordable to a larger segment of Malawi to increase consumption and volume. Offer more variety and price accordingly targeting each market segment. • Expand Sales Promotion: Introduce a 2-week sales promotion where price is lowered, comparable to the fastest-selling substitute e.g., jam and jellies--A way to stimulate consumer interest. • Encourage Product Development: Introduce honey packets and honey straws as condiments to accompany beverage-packs; make it readily available and accessible as “Sweetener of Choice.” • Improve Market Orientation: To better understand consumers and competition; to better understand what competitors’ strategies are in pricing and distribution; how good competing products are. Profitable trade can happen with deep understanding of markets and market forces. • Expand into Regional and/or International Markets in a Serious (large scale) Way: To enter the international markets, Malawi needs to build commercial volume of at least 100 tons to be taken as a serious player in the world honey market. Another strategy is to offer a variety of unique & exceptional (novel) certified honey to break into new high-priced markets. Malawi offers a greater variety of pollen types than some similar countries—need to take advantage of this position. • Plan to Enter the EU & ME Markets: As an industry, work to lobby Government to submit EU market entry request. Zambia and Tanzania are two African countries that have open access to the EU for natural honey and honey products. Mid-East is also a rising market for honey.

3.3. COMMERCIALLY VIABLE OPTIONS AND BUSINESS OPPORTUNITIES The strategies presented under section 3.2 respond to the constraints and challenges identified under section 3.1. These strategies have the potential to address the constraints and challenges which handicap and hinder the sector’s competitiveness and growth. When implemented appropriately, these interventions may not only contribute to a considerable improvement of the value chain, but also increase the subsector’s attractiveness to prospective investors. For implementation, these can best be grouped into two categories: • Those strategies that can be implemented in partnership with currently active value chain members to further improve and tighten, in situ, their production, processing, and marketing processes. • Those strategies that offer the prospect of developing commercially viable options. These business options can be designed for the private sector to exploit existing economic opportunity and to address the gaps and constraints that presently exist in the value chain. These options and opportunities will not only provide the needed services and products but could also attract more players, stimulating the sector. The implementation of these interventions is therefore vital to spark interest among private sector participants to further expand the sector. The successful implementation of these strategies can accomplish two ends: (a) increase income because of additional value-added activities and increased efficiency, and (b) create a more financially favorable perception of the natural resources-based enterprises that will encourage private sector investment in the sector. This section will focus on the second set of strategies, commercially viable options and opportunities, since the first set is self-explanatory. The opportunities presented below, as part of the second set, are by no

12 HONEY SUBSECTOR MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

means a conclusive list. They have been identified first to serve as a guide and for demonstration purposes; and second, they show bright prospects for promotion and development. The proposed enterprises have also been selected because they are relatively low-tech, require modest level of investment, and therefore suitable for smallholders in rural Malawi, and favor smallholder equity participation (creating employment opportunities) and widespread ownership. But most importantly, the outputs from these enterprises have markets, locally and internationally. Market determination should be a key factor in selecting any enterprise since lack of markets can constrain not only the expansion of existing enterprises but also the development of new ones. Since this is a crucial area, priority should be accorded to viable opportunities with the brightest indication of market potential. As already mentioned, producing higher-value products can have significant impact on smallholder income. But adding value to these products is even better since it presents the clearest prospect for increasing producer prices to income levels that could stimulate high levels of participation and production. For example, adding simple but guided activities like cleaning, grading, bulking or packing, alone increase margins for the producers. Value-adding activities identified below and suitable for processors are all relatively low-tech and require fairly low investment since they can be added to their existing production line. All of these options and ideas were put to some processors, honey clubs and beekeepers. Preliminary discussions with them indicate keen interest in these activities.

COMMERCIALLY VIABLE OPTIONS AND OPPORTUNITIES The selected viable enterprise options all contribute to improving the value chain either through the opportunity they create to link production and markets, thereby shortening the value chain; or because they improve the utilization of products, by-products and wastes, reduce post-harvest losses or create opportunity to expand sales. These enterprises can be either a stand-alone activity or several of them can be integrated and combined. For example, a honey production enterprise and wax extraction and candle making could be an integrated module. Another integrated module could be the Beekeeping Supplies and Malawi Gold Standard Training/Extension Service. These commercially viable opportunities are briefly described below.

Producer Group Enterprise Honey Production The business concept: Production of high quality, clean and pure raw honey, free of any pollen or other contaminants using modern technology and extraction practices. The output, tagged with traceability record and separated according to nectar source, is a value-added product which will be sold to large-scale processors interested in lowering their upfront cleaning costs. The provision of such a service will lower and eventually eliminate the need for processors to conduct that part of the process, thereby saving resources for higher-earning activities. The business management framework: When smallholders in a honey producing community come together to organize themselves in a group to provide this service, the end result is a producer group enterprise (PGE). The key role of the PGE is to serve as a nexus between smallholder producers and processors or other buyers and to specialize in representing smallholder-member interests. This nexus or “core”, that is the PGE, provides the framework for building a centralized activity which banks on economies of scale and value-added service. As a producer-owned and operated company, a PGE becomes the buyer of member-produced goods, which are then transformed for sale, earning a profit. The goal is for these PGEs to properly manage, market and maximize member interest by becoming business-oriented and operating profitable, market-driven enterprises, driving the farm-to-market linkage. In the case of honey, the honey PGE purchases honeycombs from member-producers. Honey is then extracted in a controlled and clean environment following a protocol to produce clean and pure raw honey free of pollen and other contaminants. This cleaned honey is sold to processors for a fee. The PGE keeps records and books on the business and, at the end of each year, shares the profit, which is distributed as a dividend to each member-producer to encourage continual participation. When operated in this manner, a PGE becomes viewed not only as a place to sell honey but also as an investment for additional returns.

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II HONEY SUBSECTOR 13

To date, smallholders have been engaged, either individually or in small clubs, in producing raw honey using rudimentary technology and extraction practices. The most prevalent equipment, called the honey press, is used to compress honeycombs to squeeze liquid honey, which is then sold to traders and/or processors. Raw honey is then further filtered, cleaned, and pasteurized by the processors to retail as table honey. The downstream cost can be significantly lowered if smallholders produce a better and cleaner product using centrifugal extractors rather than honey presses for example. Centrifugal extraction produces honey with the least amount of contaminations and a more uniform product. Because smallholders pay little attention to quality, for example avoiding mixing pollen and squeezing broods or early harvesting, honey quality produced by most smallholders in Malawi to date is poor at best and unmarketable at worst. Market preference is for clear, non-opaque honey.

Beeswax Works The business concept: Production of good quality, purified wax blocks (extracted from crude beeswax) for sale to either exporters or directly for industrial (candles, lubricants, and cosmetics) use. Since there is a fairly stable and good wax market, this business should be viable. The world market price for good quality wax is higher than the price for honey - in 2004, the average wax price ranged from US$ 2.8 to US$ 4 per Kg. depending on the quality. Since candle making requires simple technology, candle production can also be an added activity under this business. Both wax blocks and candles can be sold for a profit. For example Zambia is exporting beeswax to the EU, while Tanzania has been selling to Japan, USA and the EU. Malawi should join the same league. Conversion of crude beeswax to purified wax blocks requires simple technology and modest investment. Since this enterprise requires a stable supply of crude beeswax, this business could also be undertaken by smallholder-owned and operated PGEs given their base of honey suppliers. However, individual businesses could also just as easily engage in this enterprise as a money-making activity, buying crude beeswax from beekeepers and/or smallholders through their PGEs.

Malawi Gold Standard Quality Training and Extension Service The business concept: This fee-based, service-oriented, business entails the provision of high quality, practical, easily understandable training targeting smallholder beekeepers and PGEs. Training will result in participants being better beekeepers producing quality honey. Successfully receiving training from an Malawi Gold Standard trainer also qualifies the participant’s entry into the Malawi Gold Standard-quality club. If the participant maintains his/her quality, his/her honey can be part of the product filling the honey jars marketed with the Malawi Gold Standard Seal of Quality, signifying the ultimate best in terms of honey quality in Malawi. The business management framework: The Malawi Gold Standard training service business strategy will be to ally itself with PGEs that are part of a stable, relationship-based partnership with processors and/or exporters who have a commitment to the success of the PGEs. These “enlightened” processors and exporters understand that the success of PGEs has a direct, positive impact on their own success: increased sale of high quality processed honey. When PGEs are part of such an alliance, it means that first, they have a ready market and, second, they will need to produce quality product. Given that PGEs cannot be everything to everybody (i.e. members), it will be in the interest of PGE management to identify and make available services such as training and information that will further empower their members. In the case of honey, some processors such as EPL and Chiwogoro Apiaries are already funding their own training programs to enable beekeepers to produce quality products. The MGS quality training service should be welcomed by the processors primarily because it will ensure production of a consistent product, and secondly, it has implications on reducing and even eliminating their training expenses, thereby improving their ability to lower price for the consumers. When Malawi Gold Standard honey training service providers work in partnership with PGEs engaged in honey production, they will have access to the network of individuals and other organizations such as clubs that form the member base of the PGE. It is through this mechanism that both technical and business training and information can be channeled to the participants. It is advisable that the Malawi

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Gold Standard trainers working with the PGEs live in close proximity to the PGE members so that they can be more accessible to their clients. Living close to the clients also provides the opportunity to monitor progress and build a sense of goodwill.

Beekeeping Supplies The business concept: As the honey sector expands, those beekeepers with links to rising markets will face a corresponding need for supplies to meet market demand. Beekeeping supplies such as ready-made hives, or ready-to-use top-bars, honey-kits that include such items as veils to protect the face, gloves, suits, smokers, sieves all will be needed to support the honey industry. An enterprise whose goal is to cater to the needs of enterprising beekeepers for a reasonable fee will be providing a service to this community by offering the product and convenience. Setting up such a supplies and services business can depend on the size of the client base being served; it can start with a modest investment. Since this enterprise requires access to beekeepers, this business could also be undertaken by smallholder-owned and operated PGEs given their base of members. However, individual businesses could also just as easily engage in this enterprise as a money-making activity. This activity is also suitable for combining with the training opportunity described above.

Honey Sticks and Sachets (packets) The business concept: Production of new products using honey. Honey sticks are soft-drink straws individually filled with honey; sachets are 9 g. plastic packets filled with honey. While honey straws can serve as a good, healthy substitute for candy, honey packets can fill the same role in the beverage arena replacing sugar and other sweeteners. Target market for honey straws, particularly if different colored straws are produced, would be primarily school children, providing them with a healthy alternative to candies that contribute to tooth decay. Target markets for honey packets are resorts, restaurants, hotels, hospitals, airlines and similar institutional buyers. Machine equipment to produce honey sticks is relatively cheap depending on the size. A 500 stick per hour machine can range anywhere from US$ 500 to a US$ 1000 per machine. Honey packet/sachet machines are relatively more expensive and would be a better fit for a manufacturer who already has similar product lines. All these business opportunities can serve as points of leverage for COMPASS to achieve its goals and objectives. Preliminary assessment also indicates that all these opportunities could be commercially viable. However, they will require formal financial analyses or business plans to confirm feasibility and to maximize returns.

3.4. INNOVATIVE PARTNERSHIP MODELS Strategies and opportunities are only as strong as their implementation. Being mindful of this, it is therefore important to first develop an implementation framework that can successfully promote the integration of smallholders in Malawi’s natural resources-based product value chains, particularly since the same framework can be meaningfully applied across all three commodities. The smallholder commercialization approach illustrated below offers one of the best approaches to integrate smallholders in a value chain because it not only embraces smallholders as partners, but it also focuses on enhancing their capacity to participate more equitably, while creating value for smallholders through commercial linkages established with private businesses. When smallholders are linked to existing or ready markets through promising partnerships with commercial companies that are mutually beneficial, it has the potential to create significant gains in employment and quickly increase household cash flow for smallholders.

SMALLHOLDER COMMERCIALIZATION FRAMEWORK The smallholder commercialization framework outlines the mechanism for working with smallholders so that they are successfully able to market their natural resource based products or services reliably,

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II HONEY SUBSECTOR 15

economically and equitably. The process for smallholder commercialization involves first understanding the commercial potential of smallholders; it requires identifying and unlocking constraints to commercialization. It also calls for mobilizing, organizing and strengthening the smallholders into formal groups to gain primarily from economies of scale. Formal groups, in many cases, would be PGEs, formed by smallholders living in communities or villages, to provide a centralized location to collectively sell their products, whether it be honey, mushroom or fish. When PGEs strengthen themselves to fill as much of the backward and forward linkages themselves, for example equipping themselves to add value and facilitate access to inputs and extension, they are able to bring more income to the PGE members. Where there are already producer groups or clubs in operation, a PGE could be created to further add value and collectively market their product to gain from scale and more importantly, to lower transaction costs that are rife for rural producers and entrepreneurs. When PGEs work correctly, they not only provide a much needed service, but they also promote risk sharing, lower marketing costs, capture added value, and raise bargaining power. In addition, PGEs contribute to increasing efficiency by shortening the value chain due to the need for fewer intermediaries between producers and market. Well functioning PGEs are transparent, seamless in their function between producers and value addition and collaborative by virtue of their provenance. The idea is that when more PGEs become commercial successes, the more products they will demand from their producer members. This “demand pull” in turn increases opportunities to productively engage and empower smallholders, while earning a profit. High quality raw honey processing is a good example of a value-added economic activity a PGE could engage successfully in Malawi. In this example, the PGE would buy comb honey from its member producers, have the necessary equipment to extract quality honey, engage a trained person to supervise and advise the process and sell a higher-grade, consistent raw honey (liquid) product to larger, commercial processors or directly in the local market, for a margin. However, in Malawi, as in many parts of Africa, producer groups such as a PGE require assistance to become business-oriented and service-based. Capacity building and training on business and financial management, organizational development, management and leadership would help to ensure that such intermediate-level market entities continue to succeed in providing the vitally necessary community-to- market linkages for rural producers. When PGEs are well-functioning and successful, they become attractive to commercial entities such as processors and exporters. Since businesses and buyers prefer to deal with as few suppliers as possible, PGEs representing a mass of producers become sourcing entry points. The emergence of an entity responsible for ensuring reliable delivery of products by itself can lower costs, reduce liabilities and improve efficiency. Under such circumstances, establishing commercial linkages with better terms benefiting PGEs becomes much easier. Commercial linkages with reputable companies provide not only ready, guaranteed markets, but they can also be a source of technical assistance, technology transfer and even credit. Establishing such market linkages offer smallholder producers the opportunity to be partners in the value chain, while offering the processors or exporters the chance to increase their supply base and benefit from scale without the associated capital investment. Many of these market linkages and partnerships between smallholders and businesses can be carried out under various arrangements such as through out-grower schemes, contract production and/or marketing arrangements. The kind of institutional relationship to pursue is often influenced by the level and size of the enterprise as well as by the involved parties’ ability and desire to share risk, costs and benefit of being part of the value chain. Regardless of the nature of the market linkage, such partnerships benefit both parties. Such relationships can help increase production, processing, marketing and management

16 HONEY SUBSECTOR MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

practices of smallholder producers and their PGEs, while enhancing the competitiveness and profitability of the businesses. When partnerships are collaborative, equitable and innovative, they raise the level of the value chain itself, creating a win-win situation for all. For the honey subsector, we propose the following two potential market linkages or partnership models to help improve the honey value chain from a competitiveness perspective and also to slowly mainstream Malawi’s smallholder honey producers into formal enterprise and trade.

SMALLHOLDER HONEY IMPROVEMENT PROGRAM The smallholder honey improvement program is a pilot partnership model designed to test the feasibility of PGEs safeguarding quality and marketing high-grade honey. Under this model, select PGEs will be directly linked with processors, who are committed to serving as guaranteed markets for the PGE- produced honey. Chiwogoro Apiaries and EPL are two processors who have expressed interest in participating in this model since they too stand to gain from the linkage. Under this model, smallholders either individually or through groups or clubs living within reasonable distance from each other will be encouraged to come to a central location with technology for adding value, safeguarding quality, and taking the burden off from selling individually. As part of the program, these PGEs will be assisted to establish a centralized honey collection and processing center, equipped with the appropriate technology to add value, whether it is honey extraction or beeswax production. These value-adding activities will enable the PGE to increase income to become a viable service-oriented enterprise. Because PGEs are producer-owned and operated, profits earned from their value-added activities will be distributed as dividends to active members who produce for the PGE. In the honey sector, the biggest constraint is quality, which usually begins at the source. In order to minimize the destruction of honey quality, this program will follow two tracks. The first track will focus on training smallholders, their groups and clubs on what quality is and how to expand production of good quality Malawi Gold Standard honey. The second track will focus on encouraging smallholders to serve as “outgrowers” producing and delivering their ripe honey combs to their PGE so that the PGE can engage in honey extraction using the right methodology and equipment, under the correct environment. At the PGE, comb honey is extracted, segregated and bulked. The bulked honey is then transported to processors, where it is further processed and packaged for either retail sale or export. As part of track two, PGEs will be assisted with training on such enterprise essentials as hygiene, production, record and book keeping, financial management, marketing and corporate governance to ensure proper management of the PGE. The innovative partnership is between the processor and PGEs, where PGEs produce high-grade honey, on contract, that is volume based as well as price based. Because of their contractual relationship, it will be in the interest of the processor to work directly with the PGEs on quality, product grading and segregation to comply with processing protocols and buyer specifications. To make the relationship formal (not necessarily legal), it is recommended that a memorandum of understanding (MoU) be drawn between the processor and PGEs outlining their contractual arrangement. The MoU should also be accompanied by a “code of conduct” that enshrines on paper each member’s roles and responsibilities in the partnership. Similar partnerships between PGEs and Chiwogoro Apiaries could be piloted in the north near the Nyika National Park. Another pilot led by EPL could be facilitated with smallholders in Nkhotakota, where Eco Products is already active.

SMALLHOLDER BEESWAX COMMERCIALIZATION PROGRAM The smallholder beeswax commercialization program is yet another model that focuses on adding value to smallholder production in order to increase household income and improve their quality of life. This partnership focuses on linking PGEs with buyers of beeswax either for the candle industry or for export. As indicated earlier, beeswax has a relatively stable international market, with purified beeswax fetching as much as US$ 2.8 to US$ 4 per Kg. While Malawi’s wax industry is in its infancy, there are buyers in Zambia for example interested in procuring Malawian beeswax.

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II HONEY SUBSECTOR 17

Since production of purified beeswax requires simple technology and modest investment, as well as a supply base of beekeepers, this model will focus on working with PGEs that are already engaged in honey extraction. In fact, this program will help the PGEs to diversify their enterprise portfolio in order to maximize their revenue and meet cash needs. Additionally, given that honey production is a seasonal activity and crude beeswax generally takes a long time to deteriorate, beeswax production would not compete with honey production. At present, beeswax, a by-product of honey, is viewed by beekeepers as a waste product and has little to no value in rural areas. In order to capture this opportunity, PGEs will have to be trained in producing good quality, purified wax blocks. In time, with experience, the PGEs could expand into producing candles for the domestic market as well. However, for the time-being, the program will concentrate on the production of wax blocks. The innovative partnership under this model is the marketing arrangement between the PGEs and the buyer of wax. Since little value needs to be added after the production of the purified wax blocks, the PGEs can work with the exporters/buyers to market and export their wax for a fee. Such marketing agreements help keep the cost of the product down and margin up for PGEs, while contributing to commercialize smallholder production.

18 HONEY SUBSECTOR MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

4. THE WILD MUSHROOM SUBSECTOR Wild mushrooms are highly favored by Malawians and viewed as a delicacy, when they become available right at the heels of the first rain. Since wild mushrooms are intrinsic in the national diet diet, it is high in demand. Malawi’s Export Promotion Council estimates that local demand is around 80 MT per year10. However, production or availability of wild mushrooms does not meet demand, particularly in light of the country’s receding forests. Malawi is said to be rich in mushroom biodiversity. But very little information is available in terms of varieties, availability or exploitation. At present, two of the supposedly many varieties available in Malawi are in high demand, particularly in Europe. Both the Boletus edulis and Chanterelle are currently being harvested, dried and successfully exported from Malawi to primarily the EU food-ingredients market. The EU imports of dried mushrooms from developing countries have been increasing. In 2003, EU imported approximately 14,000 MT of dried mushrooms from developing countries. Malawi’s contribution to the EU trade of wild mushroom is negligible. Malawi’s wild mushroom subsector is dominated by two commercial processors, and a multitude of smallholders who “forage” the reserves and parks. It is common practice in Malawi for people to enter forests, both outside and inside protected areas, to collect mushrooms for sale locally. Mushroom collection is an activity that is mainly carried out by women and children, providing them an important source of annual and supplemental income. At present, given their availability, level of exploitation, and dependence on rain, wild mushrooms remain a subsistence source of income for many living in proximity to Malawi’s forests. While smallholders sell the mushrooms locally to traders and passersby on the roadside during the season, the two processors have commercial establishments and engage in commercial harvesting, which means they employ a large number of local community members for collecting mushrooms. The harvested

Figure 3: Malawi Wild Mushroom Subsector Map

Informal/ Formal Rural Households International Markets Urban Households

Retail Road-side Sale Shops

Wholesale Commercial Clubs Processing Processing/ (organized and (Drying) Packaging Unorganized)

Bulking

Clubs Harvesting / Smallholder Harvesters Production Smallholders Hired collectors

Channels Channel 1 Channel 2 Smallholders Commercial Processors/Exporters

10 University of Namibia. February 2001: UNDP/UNOPS Regional Project “Promoting Sustainable Human Development in Africa—Mushroom Farming Training Workshop.” Lilongwe, Malawi.

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mushrooms are then dried for export. Those for the local market are almost all sold fresh. There are no definitive figures on either volume or value of the wild mushrooms that are harvested and either sold in the local market or exported from Malawi. However, based on interviews with the producers and processors, it can be estimated that approximately 70% of the export consists of Chanterelle, with Boletus edulis making up the rest. The last two years have seen a rise in exports by approximately 150%. This performance could continue if accessibility and productivity of the current and future growing areas improve. The continuing strong demand for African wild mushrooms due to its superior quality, particularly in Europe, is what is driving the commercial wild mushroom industry in Malawi. But exporters worry that a lack of forest management, uncontrolled harvesting, fragmented marketing at the smallholder level, and competing domestic demand will affect the availability for the higher-paying exports11 reducing the potential to earn more euros. Wild mushrooms command premium prices ranging from US$ 5 to sometimes even US$ 40 per Kg8 in the EU markets. Prices of this kind help to ensure profitable sales, and generate employment and income for rural communities in Malawi. In order to maximize the economic potential of this subsector, other alternatives and opportunities need to be developed particularly in light of the average Malawian’s preference for mushrooms. Both export and domestic markets are calling for better management and utilization of the country’s forests and protected areas in order to enhance production. However, forest management and improved harvesting alone will not be sufficient to meet demand. Alternatives such as diversification into cultivated mushrooms needs to be seriously considered as a way to satisfy, particularly, the domestic market. Production of cultivated mushroom should relieve some of the competing pressure for exports, improving the possibility to earn more foreign exchange. It can also “extend” the mushroom season and open additional income and employment generating opportunities for rural communities.

4.1. MUSHROOM SUBSECTOR CONSTRAINTS AND CHALLENGES The mushroom subsector is beset by constraints similar to those being faced by the honey subsector. Macro-level constraints such as poor infrastructure, absence of market information, lack of affordable finance and high transportation costs inhibit the mushroom industry as well. Like the honey industry, these all contribute to raising risks and transaction costs for the industry. In addition, important external factors such as variable weather conditions, shrinking forests and uncontrolled harvesting of other forest products all add to uncertainty, further threatening industry competitiveness. The wild mushroom value chain is fairly simple since mushrooms are either sold fresh by the smallholders or exported dried by the processors. Many of the sectoral constraints arise within the production and harvesting end of the value chain primarily due to the pressures of a short production season, which lasts only a few weeks. Processors say that if one is not prepared during this period, it can jeopardize a company’s financial viability since an entire season is lost. Preparation usually involves organizing and training large numbers of harvesters/pickers. However, since commercial harvesting competes with smallholders, a shortage of skilled labor availability can be constraining. This is further accentuated by the prevailing attitude men hold about mushroom collection in rural areas: Mushroom harvesting is viewed as a job for women and children and consequently there is failure among men to take it “seriously.” Quality, hygiene, lack of trained labor, dwindling supply and fragmented marketing are all issues that challenge the industry. Often, roadside sellers and entrepreneurs, who are pickers by dawn and wholesalers or retailers by day, complain about having to travel longer distances to find smaller loads of smaller-sized mushrooms. Because of a large number of very small operators/sellers, they complain that competition is being created by “other” people who don’t live around the forest resources. Forest management and utilization enforcement, or lack thereof, combined with competing interests in forests, continue to restrain expansion and development of the subsector.

11 Field interview, April 2006, Mzuzu, Malawi.

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Table 3 presents some key constraints and challenges currently confronting the industry. The objective is to develop interventions that contribute to the sector’s growth and development. Table 3: Constraints and challenges facing the wild mushroom value chain

Value Chain Constraints and Challenges Function

• Low volume due to dependence on slowly depleting forests, parks and reserves, especially pine forests for Boletus, other for Chanterelle. • Low product quality primarily due to smallholders lack of understanding of quality • Very short season (only a few weeks a year) • Highly dependent on weather/rains • Lack of skills in cleaning mushrooms • Not viewed seriously by men given that collection perceived as women and children’s job Production and • Mushroom collection viewed as a subsistent activity given the low earning potential Harvesting • High rate of wastage (about 25 to 35%) • Atomistic production resulting in intense competition and small volume; everybody remains subsistent • Lack of forest management and utilization enforcement • Takes longer and farther to find mushrooms • Smallholders are insecure about present user rights enforcement • Absence of proper organization to take advantage of scale • Training costs high during peak harvest season due to shortage of the willing from communities surrounding forests. This can result in having to train entire villages, which can raise the cost of production. • Low quality of cleaned mushroom • Low volume of quality mushroom for processing since drying requires a lot of volume. • Lack of technical knowledge Consolidation • Lack of affordable and appropriate technology available to smallholders (e.g., solar dryers) and Processing • Lack of access to trade finance at reasonable rates during peak buying season implies buying smaller volumes from smallholders thereby increasing unit costs. • Poor roads combined with lack of suitable transportation increase the price of final products and makes competition with imports and substitutes more difficult. • Processors view smallholders as competitors thwarting industry collaboration & coordination Processors operating in isolation from the communities, causing animosity and distrust in some cases. • Industry dominated by informal trade and fragmented marketing system • Roadside selling is prevalent marketing practice • Weak marketing channels made worse by highly perishable nature of product and room to add little value for the domestic market. • Market preference is for fresh mushroom, but due to the perishable nature of product, marketing in a wider area is reined in. Marketing • On the flip side, because of the local preference for wild mushroom and seasonality, pricing is ad-hoc and high, discouraging sale. • Commercial processors’ marketing channel starkly different from overall industry. • Absence of proper organization at the smallholder level to transport product to market • Lack of appropriate packaging materials suitable for transporting product to market (to reduce loss)

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4.2. AREAS FOR STRATEGIC IMPROVEMENT IN THE MUSHROOM SUBSECTOR Given the average Malawian’s penchant for wild mushrooms, local demand for the product competes fiercely with exports. This is further amplified by the lack of sufficient production due to the country’s declining forest cover most conducive for wild mushroom production. Moreover, the prevailing atomistic production and marketing system, where a multitude of small operators with even smaller volume compete intensely to market a highly perishable product, has also contributed its share to the sector’s product availability pressures. Product availability to satisfy market demand is the biggest issue facing this subsector. Production or availability of wild mushrooms can be improved through better forest management, expansion of growing areas and better harvesting practices. It can also be enhanced through improvements made within the value chain, for example by improving the sector’s underdeveloped and fragmented marketing system. Fragmented marketing presents one of the biggest challenges because it prevents, among other things, consolidation and bulking to produce commercial volumes that can be marketed for a meaningful return. But what is really critical for the sector is to develop alternative approaches to expand production and availability. This calls for innovative options and economic opportunities that not only help meet demand, but also provide secure and adequate sources of income and employment for rural communities. Diversifying into cultivated mushroom and even solar drying are alternatives that promise to successfully address the production as well as income concerns. Cultivated mushrooms, for example, are an option that has already been tested in Malawi. Because they are relatively easy to grow and requires low investment, low technology, and tastes equally good, mushroom cultivation has the potential to succeed in meeting domestic demand. Success in commercialization of this economic option could have positive implications for the higher-return export sector as well. Table 4 considers various strategies and options to address the challenges confronting the wild mushroom subsector. While the implementation of some or all of the recommendations can improve the industry, the biggest bang with measurable impact, in support of the wild mushroom sector, promises to be mushroom cultivation.

Table 4: Strategies for improvement in the wild mushroom value chain

Value Chain Strategies for Value Chain Improvement Function

• Provide Training on harvesting skills to increase marketable volume and reduce waste. Training needs to focus on improving cleaning skills as well. • Access Additional Growing Areas: Gaining access to additional forests, reserves and parks could be one way of increasing marketable volume of wild mushrooms. • PGE Formation: Increase marketing efficiency and effectiveness by introducing mushroom producer marketing organization or group. Organization can lead to building volume. Large volume is more attractive to formal businesses. It also can contribute to limited number of intermediaries. End result is the emergence of a more formal, more efficient and effective marketing system, and empowered producers. In addition to increasing scale and lowering Production and transaction costs, it can also minimize exploitation of smallholders by intermediaries. Harvesting • Establish Linkages to Buyers: Establish partnership with buyers and processors to guarantee market, formalize economic activity and enterprise, and lower dependency on itinerant traders and practice of roadside selling, which makes both product and person (sellers are usually women and children) vulnerable. • Provide Training on Business and Management Skills: Train mushroom collectors/ harvesters and clubs or groups to think & operate like a business, maintaining records and budgets. • Access Appropriate Alternative Technologies: Given the highly perishable nature of mushrooms, the pressure is high to sell at rock-bottom price. With access to alternative technologies such as solar dryers for drying mushrooms, wastage can be reduced while increasing the opportunity to increase smallholder income and contribute to food security.

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Value Chain Strategies for Value Chain Improvement Function • Introduce Alternative Opportunities: Diversify into mushroom cultivation to expand mushroom production in order to satisfy local demand and improve potential to increase household income for rural households. • Increase Processing Efficiency: By diversifying into new product lines during the off-season, for example by packaging and marketing cultivated mushrooms produced by smallholders to local supermarkets and shops. This can assist in lowering processing costs and increasing market opportunities for smallholders. • Help Train Communities: Educate and train communities on quality and standards, transfer skills and knowledge not just to be in compliance with government requirement, but also as an indication of respect for social and environmental values. Training and such activities offer opportunities to practice company social responsibility and build sustainable, trust-based relationship with the communities. Consolidation and Processing • Establish Backward Linkage: Develop partnerships with PGEs to establish links to assure consistency in supply. • Acquire ISO/CODEX Certification: Obtaining certification related to food safety, quality control and quality assurance is central to achieving premium export prices and a safer product. • Access to Mediation for Contract Enforcement: To discourage contract breach between mushroom producers/collectors and processors, and prevent lengthy court battles and costs. • Improve Community Relationship: Increase community participation, communication and openness to engender trust. At present some processors are operating in isolation from the communities, causing animosity and distrust in some cases. • Expand Marketing Opportunities: Link up with local supermarket chains such as PTC and Shoprite to distribute and retail cultivated mushroom. • Support Consumer-Friendly Pricing Strategy: Increase volume and lower price for the local market to make it affordable for a larger segment of Malawi to encourage consumption. The current pricing strategy for wild mushroom is viewed by many as opportunistic price-gouging. Marketing • Introduce Promotional Campaigns: Launch sales campaigns on TV and other similar media to inform and educate consumers about the cultivated mushrooms and in the process increase familiarity and product acceptability to generate demand. • Access Improved Packaging Materials: Assist in identifying packaging materials in order to reduce waste during storage and transportation.

4.3. COMMERCIALLY VIABLE OPTIONS AND BUSINESS OPPORTUNITIES The strategies presented under section 4.2 respond to the constraints and challenges identified in section 4.1. In addition to addressing the constraints and limitations within the value chain, some of these strategies have the potential to expand the industry and contribute to the sector’s growth. As with the honey subsector, the strategies recommended in Table 4 above can be categorized according to how they are applied. Some strategies help make adjustments in the value chain in situ, while others suggest introduction of new options to exploit opportunities. Both categories of strategies result in eventually increasing value chain efficacy. This section will cover those strategies that inject the possibility of developing new commercially viable options to harness the excellent opportunities for backward or forward linkages to smallholders. The successful implementation of these strategies can accomplish two ends: (a) increase income because of additional value-added activities and increased efficiency, and (b) create a more financially favorable perception of the natural resources-based enterprises that will encourage private sector investment in the sector. The options and opportunities presented below are only a select list of ideas and are by no means final. They have been identified primarily for demonstration purposes, to convey the message that natural resources-based enterprises can have bright prospects if they are market-driven, have sufficient resources

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and are managed creatively. The proposed enterprises also have been selected because they are relatively low-tech, require modest level of investment, are therefore suitable for smallholders in rural Malawi and favor smallholder equity participation (creating employment opportunities) and widespread ownership. Moreover, the knowledge base for both wild and cultivated mushrooms exists in Malawi. But most importantly, the outputs from these enterprises have markets locally and internationally. As is the mantra of COMPASS II, market determination should be a key factor in selecting any enterprise since lack of markets can constrain not only the expansion of existing enterprises but also the development of new ones. As already mentioned, producing higher value products can have significant impact on smallholder income. Adding value to these products is even better since it presents the clearest prospect for increasing producer prices to income levels that could stimulate high levels of participation and production. For example, adding simple but guided activities like cleaning, grading, and bulking can increase margins for the producers. Both ideas were presented to some processors and producers/collectors living around forest reserves. Both groups welcomed the concept. The smallholders particularly appreciated the possibility of combining some of the ideas with the beekeeping enterprise.

COMMERCIALLY VIABLE OPTIONS AND OPPORTUNITIES The following two viable enterprise options help expand production to primarily satisfy local demand. They also improve the value chain either through the opportunity they create to link production and markets, or they improve the utilization of products, promote preservation, reduce post-harvest losses, or create opportunity to expand sales. These enterprises can be either a stand-alone activity or integrated. For example, since mushroom cultivation and the PGE mushroom drying operation are related, they could be combined. These commercially viable opportunities are briefly described below.

Mushroom Cultivation The business concept: Commercial production of mushrooms by smallholders as a year-round supplemental source of income. Pilot test with two easy to grow varieties (Volvariella volvacea, commonly known as Straw mushroom and Pleurotus spp, also referred to as Oyster mushroom). Both varieties have been tested in Malawi and have been promoted at one time or the other by various development organizations. Trainings on mushroom cultivation have been provided through several agricultural research stations and the Bunda College of Agriculture. Production of either species does not require composting of substrate. Instead both grow directly on various germ-free, agricultural wastes containing cellulose, such as paddy straw, sawdust, and even cotton waste. Substrate (straw) can be made germ-free either with chemical treatments or pasteurized using the steaming method. Both varieties require low technology, a dark room (30°C to 35°C temperature) and inoculants to get the enterprise started. Harvesting can be carried out relatively soon after spawning, as early as within a fortnight, and thereafter. The output can be packaged into family-sized plastic bags and sold either directly in the local market or through supermarkets. The plentiful availability of these varieties of mushroom can lower the demand pressure on wild mushroom and at the same time help increase household income for rural communities. The business management framework: Smallholders living in proximity to forest resources engaged in wild mushroom collection can add mushroom cultivation to their portfolio of enterprise as an approach to supplement their income. Engaging in mushroom production need not necessarily be a group activity at either the club or PGE level. This activity lends itself well to individual household-level production. However, it is recommended that members within a club or PGE engage in the same activity to build volume for purposes of transporting and marketing. For this activity, the key role of the PGE is to serve as a nexus between smallholder producers and processors or buyers, and to specialize in representing smallholder-member interest. This nexus or “core”, that is the PGE, provides the framework for building a centralized activity which banks on economies of scale and value-added service, such as bulking, transporting, and marketing. As a producer-owned company, a PGE becomes the buyer of member-produced goods, which are then marketed, earning a profit. The goal for these PGEs is to properly manage, market, and maximize member interest by becoming business-oriented and operating

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profitable, market-driven enterprises, driving the farm-to-market linkage. In the case of mushrooms, the PGE purchases mushroom from its member-producers, conducts preliminary sorting and grading, and either sells directly to the market or/and transports to the processor or packer for a fee. The processor or packer further grades, sorts and distributes to supermarkets and similar retailers. The PGE keeps records and books on the business and, at the end of each year, shares the profit, which is distributed as a dividend to each member-producer to encourage continual participation. When operated in this manner, a PGE becomes viewed not only as a place to sell the mushroom but also as an investment for additional returns.

PGE Mushroom Solar Dryer The business concept: Production of solar-dried wild and cultivated (oyster) mushroom by smallholders for various purposes: to prevent wild mushrooms from being wasted if they cannot be sold in time, to provide a “new” product to consumers, and to promote food preservation and food security. The output is a value-added product which will be sold for a profit either directly to consumers in the local market or to exporters interested in supplementing their export volume. The business management framework: Solar-dried mushroom production is best carried out through a centralized solar dryer, operated by a PGE given the opportunity to profit from economies of scale. The operation of a centralized solar drying enterprise is very similar to the operation of a centralized coffee pulping mill operated by a coffee cooperative. The PGE can either purchase fresh mushrooms from its members and dry them for sale to either the exporters or the local market or the PGE can provide solar drying as a service (for a fee) to its members. Like the PGE defined above, here too the key role of the PGE will be to serve as a nexus between smallholder producers and buyers or exporters and specialize in representing smallholder-member interest. As a producer-owned enterprise, a PGE can play the role of a buyer of member-produced good, which is then marketed, earning a profit or it can exist to provide a service for a fee. In either case, the goal for these PGEs will be to properly manage, market, and maximize member interest by becoming business-oriented and operating profitable, market-driven enterprises, driving the farm-to-market linkage. As a profit-making enterprise, the PGE will keep records and books on the business and, at the end of each year, share the profit, which is distributed as a dividend to each member-producer to encourage continual participation. When operated in this manner, a PGE becomes viewed not only as a place to sell mushrooms but also as an investment for additional returns Both options can be further developed in more depth for the private sector in rural communities to exploit existing opportunities. If launched properly, these enterprises will not only provide the needed services and products but could also attract more players, stimulating the sector. Preliminary assessment indicates both opportunities could be commercially viable, but they will require formal business plans to assess how best to maximize returns for the smallholders.

4.4. INNOVATIVE PARTNERSHIP MODELS As indicated in earlier sections, strategies and opportunities are only as strong as their implementation, particularly for the mushroom sector. While there have been several mushroom cultivation development activities in Malawi, meaningful change and commercial progress has been slow to materialize, particularly for the rural communities. The strategic approach that is necessary to reach a scale that will stimulate significant private sector interest and to ensure that as large a number of smallholders as possible benefit has yet to be tested. Commercial outreach has been low, participation appears to be weak and programs promoting its development seem to be a little too supply-sided, failing to give the boost that is needed to show its mettle. The innovative partnership models that have been presented throughout this report are all premised on commercialization. The partnership or market linkage we have forged below is anchored on the smallholder commercialization framework articulated in section 3.4.1. The partnership attempts to integrate as many smallholders in the value chain as possible with equitable participation. It creates value for smallholders and their PGEs, so that PGEs can in time become the backbone of their respective

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communities, successfully fueling economic activities that further generate income for smallholders on a sustained basis. The two market-linkage opportunities proposed below can, if implemented, contribute to further improvement of the value chain, product availability, and industry competitiveness. While both opportunities are linked to the same exporter/processor, Chanterella Pvt. Ltd., they are different activities addressing different gaps and needs. The partnership illustrated below has been discussed with the processor/exporter, who has tentatively agreed to test at least the first activity, particularly in light of his responsibility, required by the Department of Forestry, to work with neighboring communities.

PGE MOBILIZATION FOR LINKAGE A key driving factor for businesses to engage in contract production or similar vertical coordination arrangement is to mitigate as much as possible the financial and non-financial costs of dealing with myriad small suppliers, particularly if the latter are widely dispersed geographically and small in size. In the wild mushroom sector, one of the biggest constraints is organizing collectors to harvest mushrooms. Organizing a reliable group of community members can be a daunting task particularly given the very short season of production. Additionally, the Department of Forestry requires that businesses utilizing Malawi’s forest resources for non-timber forest products work with the communities living in proximity of the forest areas. Working entails, among other things, training, skill building and similar knowledge transfer to community members. Since organizing producers is a core activity essential for the success of the business, this activity attempts to fill that gap. The PGE mobilization activity focuses on identifying and organizing communities and their members to form a PGE following the methodology described in earlier sections. The objective of this activity is to enable PGEs thus formed to eventually take on the responsibility of training their own members on better harvesting practices, cleaning and grading skills, collecting and bulking and transporting to the processor. While the PGEs and their members learn to add value and earn more per unit harvested, the processor gains from lowered transaction and production costs. This kind of partnership gives both parties a better deal. Both sides win and there is enough value added to make everyone better off.

SMALLHOLDER MUSHROOM CULTIVATION AND COMMERCIALIZATION The smallholder mushroom cultivation and commercialization opportunity is a pilot partnership model being proposed to test the concept and feasibility of linking a PGE, who through a more competitive smallholder bulking and transportation arrangement with a processor would increase urban access and utilization of cultivated mushrooms. In this schema, the PGE would bulk smallholder cultivated straw (Volvariella volvacea) and oyster (Pleurotus spp) mushrooms, and sell to a processor like Chanterella Pvt. Ltd., who would bring to bear his quality control and quality assurance systems to grade and package the fresh mushrooms as a labeled product for distribution and sale to supermarkets and convenience stores. Since production of both the straw and oyster mushrooms requires simple technology, fairly low investment and rudimentary tools, it can be fairly easily assimilated by nearly everyone with proper training. The key objective is to increase the available volume of mushroom to satisfy the local demand since there is little that can be done about directly increasing the production of wild mushrooms. The second objective is to introduce mushroom cultivation to not only make mushrooms available year- round, but also to serve as a good substitute for wild mushrooms in order to help increase Malawi’s exports. An additional objective underpinning the entire concept is to introduce mushroom production as a commercial, year-round activity to help rural communities increase their household income on a sustained basis. At present, very little mushroom is being commercially cultivated by smallholders in rural communities, particularly among those that live around forests and reserves. We believe that with adequate training and assistance to smallholder communities and their PGEs, combined with market-driven partnerships, mushroom cultivation can actually make a demonstrable difference in the lives of those participating in this activity.

26 WILD MUSHROOM SUBSECTOR MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

5. THE AQUACULTURE SUBSECTOR The fisheries sector is one of the most important sectors in Malawi, both from an economic as well as a social perspective. FAO6 reports that in 2002, fish had a beach value of about US$ 21 million, and contributed to approximately 4% of the country’s Gross Domestic Product, second after agricultural crops. FAO statistics further indicate that the fish industry supports nearly 1.6 million people and contributes to the livelihood, employment, and household food security of, especially, Malawi’s lakeshore communities. Malawi has five major lakes and water-bodies that supply the nation’s fish markets. Annual catch from all major fisheries is estimated to be around 40,000 to 60,000 MT, although figures vary by source. The same FAO report indicates that the annual catch in 2003 was approximately 53,000 MT, of which Lake Malawi (being the largest), contributed more than over 75%. Lake Chilwa, Lake Malombe, Lake Chiuta and two segments of the Shire River (upper and lower) make up the other four fisheries contributing to the nation’s total annual catch. All the catch is consumed domestically. Fish, being part of Malawi’s national identity and diet, is in very high demand as it is consumed regularly by all segments of the population as a source of food and protein. The country’s per capita consumption (in 2001) is estimated by FAO at 3.6 Kg. per person per year, which is far below the WHO recommended minimum requirement of about 13 to 15 Kg. In 1976, the estimated per capita consumption of fish was 12.9 Kg. per person per year. This decline in consumption is directly related to the decline in fish availability. It is said that Malawi’s overall annual fish catch has dropped by over 45% since the late ‘80s, due to various factors including over-fishing, poor fishing practices and weak resources management. Since domestic supply is not meeting the nation’s rising demand, it is reported that Malawi has also been increasingly importing fish for the past four years from Zimbabwe, South Africa, Tanzania, Mozambique, Thailand, Namibia, Swaziland and even China6. Malawi is reportedly importing about 2 MT of fish a week from neighboring Zambia as well12. According to industry experts, the decline has been most severe for the indigenous Chambo, Malawi’s fish of choice. Some report that the Chambo catch has plunged by as much as 90% over the last decade13. To compensate for this decline in domestic supply and of the Chambo supply in particular, the industry as well as the Government is taking several measures to increase fish production in the country. The rapid development of the aquaculture sector is one of the most important measures being considered since it is apparent that aquaculture may be the only feasible approach to boosting Malawi’s current and future fish supply. The fisheries sector in Malawi is composed of two groups: aquaculture and capture fisheries. Capture fisheries make up more than 98% of the country’s fish supply, while aquaculture, being a nascent industry, has barely made an impact to the overall production. The total production from aquaculture is estimated at around 800 MT (1.4% of total supply), of which 93% is tilapia, 5% catfish and 2% exotic species such as trout, bass and carp14. Pond culture is the predominant system of aquaculture practiced in Malawi; cage culture, on the other hand, is only being employed by large commercial fishing companies. Given the increasingly unfulfilled fish demand in the country, the potential for aquaculture exists at both small-scale and commercial levels. Activities to promote aquaculture particularly among small-scale producers have been ongoing for several decades, through support from various international donors and organizations. As a result, pond aquaculture is rising among smallholders. It is estimated that the number of smallholders engaged in pond culture has more than doubled since 1995. The 2002 estimate stands at 4,050 smallholder producers, owning and operating an average of 2.3 ponds each1. According to the WorldFish Center, this figure has now expanded to around 6,000, many of whom are increasingly farming fish for the market. In

12 Field Interview, April 2006. Blantyre, Malawi. 13 Field Interview, April 2006. Mangochi, Malawi. 14 FAO, October 2002: Report of the Workshop on the Promotion of Sustainable Commercial Aquaculture in Zambia and Malawi. FAO Fisheries Report No. 733. Lusaka, Zambia.

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addition to ponds, some reservoirs are also being used by communities to produce fish for the local markets. Besides small-scale producers, the number of large-scale, commercial aquaculture businesses is also on the increase. While definitive numbers are hard to obtain, it is estimated that there are five to six larger-scale aquaculture operators in Malawi. All commercial aquaculture enterprises are pond-based, except for one, which also engages in cage-fishing in Lake Malawi. Cage culture is being practiced by MALDECO in Lake Malawi on a large scale, commercial basis with a production target of 3,000 MT15 per year. To date, no small-scale producers are engaged in cage-fishing in Malawi. The estimated current production of fish from aquaculture ranges from 200 to 800 MT per year. Whereas smallholders dominate the pond-fish production, it is the larger-scale, commercial producers that are channeling aquaculture fish, mostly Tilapia, to the major market centers in Malawi. MALDECO, for example, supplies fish to the PTC depots for redistribution to its 147 retail chain outlets across the country. The smaller aquaculture farms supply the likes of Shoprite, 7-11 and similar small and medium- sized store-fronts. Because smallholder aquaculture production system is a “low input/low output” operation with small-scale producers owning one to five ponds each, the average yield achieved has not empowered many smallholders to market their product beyond the community, local rural market and the closest roadside. In fact, it is reported that a large proportion of smallholder aquaculture production is primarily subsistence oriented, partly due to low productivity and partly because they have been unable to assemble the volume required to justify incurring marketing costs.

Figure 4: Malawi Aquaculture Subsector Map

Markets Household Rural Markets Local Consumers Self Consumption 10% 90%

Harvesting Subsistence Ponds Commercial Ponds Commercial 1-2 Ponds 3-6 Ponds Cages Production

Input Suppliers Fingerlings

Channels Channel 1 Channel 2 Channel 3 Subsistence Ponds Commercial Ponds Commercial Cages

Figure 4 maps out the channels and flow of mostly pond-fish movement since a considerable proportion of aquaculture fish is pond based. While cage-reared fish is poised to hold a sizable share of this market, at present production remains marginal when compared to pond-fish production. Farmed-fish is mostly sold fresh since fresh fish is most popular in villages and towns. In areas where transport of fresh fish is not possible or at least problematic, processed (sun-dried or smoked) fish satisfy the demand. Frozen and chilled fish are options for more urban markets due to the requirement for refrigeration and availability of ice. However, given the relatively small volume of farmed-fish, most clear the market in fresh form.

15 FAO Inland Water Resources and Aquaculture Service (FIRI), 2005. National Aquaculture Sector Overview - Malawi.: National Aquaculture Sector Overview Fact Sheets. FAO - Rome.

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5.1. AQUACULTURE SUBSECTOR CONSTRAINTS AND OPPORTUNITIES Despite the increasing demand for fish, there are some who feel that aquaculture has not taken off as hoped in Malawi. Strong consumer preference for lake fish, particularly the Chambo, is the central driving reason for holding back the pace of farmed-fish sale. Furthermore, the generally small size and muddy taste picked up by pond-fish also significantly discount demand, particularly in urban markets where lake fish easily out-compete for consumer attention. Lack of proper fish feed, shortage of fingerlings, location of the ponds, distance to markets and limited extension assistance all subtract from the production potential. However, one of the most binding constraints holding down the growth of farmed fish is the lack of appropriate and cost-effective marketing options and transportation systems available to smallholders. It is therefore imperative that alternative options be developed for consideration so that commercial aquaculture, particularly smallholder-based aquaculture, can be repositioned on a more vibrant platform to boost production, increase earnings and encourage the maximization of this promising opportunity. This section presents some of the constraints and challenges that are perceived by industry to have held the aquaculture sector back. It attempts to identify particularly those bottlenecks that hinder productivity and profitability in order to intervene in the most critical leverage points that can yield high performance and positive change.

Table 5: Constraints and challenges facing the aquaculture value chain

Value Chain Constraints and Challenges Function

• Lack proper and adequate knowledge of aquaculture technologies and practices • Insufficient technology transfer or training due to shortage of technical and extension personnel • Lack of quality, quantity and timeliness of fish seed, fries and fingerlings • Lack of information and availability of affordable fish feed or alternative feed regimes • Low yield leading to low marketable volume • Lack of information delivery methods and mechanisms • Lack of access to credit to start sufficient number of ponds to make it a viable business, or to purchase other inputs such as seine nets, feed and even for expansion purposes. • Vulnerable security at pond sites Production • Poor pond management techniques and practices • Weak farmer institutions • Lack of business skills among fish farmers • Aquaculture production is driven by food security considerations rather than markets. • Aquaculture production has not taken off as it should primarily because of the lack of commercialization of smallholder aquaculture. • Aquaculture production only pond-based focused, losing opportunities to harness the water bodies through other approaches such as fish cage-culture and fish pen-culture. • Inadequate aquaculture engineering interest resulting in unavailability of appropriate technology customized for local conditions such as development of fish cages and pens. • Weak harvesting and post-harvest handling practices • Lack of supporting infrastructure such as ice for chilling, or cooling-boxes to safeguard fish Harvesting quality right at harvest. Such limited cold storage facilities make it difficult for smallholders. • Premature harvesting due to household cash-flow pressure • Lack of information on the values of harvest and post-harvest technologies

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Value Chain Constraints and Challenges Function

• The distant locations of ponds from roads make it difficult to consolidate sizable volume to justify cost of transport. • Low volume of production cut on marketing margins, serves as a disincentive for traders, consolidators and farmers themselves • Lack of or unavailability of reliable forms of transportation in rural areas also negatively impact Consolidation consolidation efforts • Lack of access to price information leading to low household revenue for producers • Lack of an appropriate central collection point for producers to bring their fish so that consolidation is efficient and cost-effective. • Lack of awareness of hygiene and sanitation issues in handling fish • Inadequate access to markets and marketing • Lack of knowledge about markets and marketing among producers • Insufficient linkages to assured buyers, particularly for smallholder producers. • Road-side selling is also a prevalent practice, which prevents consolidation of a large enough volume to attract the interest of serious traders. • Smallholder aquaculture is dominated by uncoordinated and fragmented marketing system • Low price of pond-raised fish and inadequate market information • Market preference is for lake-fish, weak demand for pond-raised fish. Marketing • Muddy taste and small size of pond-raised fish discounts price and marketability. • Lack of transportation or hauling material/facilities (such as cooler boxes, ice boxes) to transport fish to market in quality form • The lack of ability to chill fish at harvest quickly deteriorates fish quality resulting in lower price for a highly perishable product • Lack or absence of ice supply, ice-boxes or insulated container for chilling or freezing fish • Lack of quality assurance and food quality support also lowers value of pond-raised fish. • Lack of promotion of farmed-fish to dispel negative consumer perceptions

5.2. AREAS FOR STRATEGIC IMPROVEMENT IN THE AQUACULTURE SUBSECTOR Fish farming in Malawi is still at a very early stage of development. Acknowledging this reality, the Government, through its various institutions and partners such as the Department of Fisheries and the WorldFish Center, has taken significant steps to aggressively promote the sector. As part of its support package, the Department of Fisheries has revamped its extension service and is promoting programs that are supportive of smallholders as well as larger, commercial entities. Their efforts include among others, activities such as the aquaculture enhancement program led by the Chambo Restoration Strategy, the integrated aquaculture-agriculture program, and introduction of a policy framework conducive to attracting investors. Furthermore, in a bid to expand aquaculture, the Department is also working directly with farmers and NGOs involved in promoting aquaculture by providing them with technical information and farmer-to-farmer exchange of technology. Whereas the supply-side support is critical for development and expansion of the subsector, the demand- side factors, if unattended to, will suppress subsector growth. As has already been mentioned, some of the most binding constraints holding down the growth of aquaculture are first the lack of a market-driven approach, and second, an absence of a framework that promotes smallholder commercialization. It is therefore vital that improvements on the market and marketing side of the equation be intensified equally if not more to enable smallholders to exploit the opportunity created by the present deficit in fish supply. Table 6 suggests only a select list of strategies and angles to address the many challenges facing the smallholder aquaculture subsector. As previously discussed for honey and mushroom, for aquaculture too, the implementation of all or some of recommended changes can be carried out either in situ or as

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separate business ventures to take advantage of the opportunities. Both approaches have the possibility of contributing significantly to value chain improvement, competitiveness, and eventual growth.

Table 6: Strategies for improvement in the aquaculture value chain

Value Chain Strategies for Value Chain Improvement Functions

• Increase Extension Services: There is great need to train farmers on all aspects of fish production and management, from stocking to feeding to water quality management in order to increase productivity and volume. • Provide Training on Pond: Fish farmers need assistance on pond location and management. • Diversify Production into Cage fishing: Cage-fishing, which does not require either heavy capital investment or sophisticated technology, should be offered as an option to smallholders as well. Smallholder cage-culture is increasing in Africa; Zambia serves as an example where cage-culture production is also on the rise. Production • Increase Access to Finance: Access to credit for pond or cage expansion, or input purchases should be considered for smallholders to increase fish supply. • Increase Access to Inputs such as Fingerlings, Fish Feed, and Supplies (cages and pens): The private sector should be encouraged to step in to provide these services. There is need to help break the perception that operations such as “fingerling production” or “fish feed mills” require heavy investment and complex technology. Concise business profiles with business plans using appropriate technology and indigenous materials (such as cassava) should be offered to the business community to help move these opportunities along. Absence of information and knowledge of appropriate technology or best practices have also contributed to hindering subsectoral development and expansion. • Provide Training on harvesting and post-harvesting practices such as proper icing of fish, to proper handling to safeguard quality and food safety. • PGE Formation: Increase competitiveness of markets by introducing producer marketing organization or group, which should lead to reducing not only marketing margins, but also risks arising from lack of competition at times of need. End result is the emergence of a more competitive marketing system and empowered producers. In addition, economy of scale and provision of services (where none existed) can be achieved resulting in further lowering transaction costs. • Provide Training on Business and Management Skills: Train fish-farmers and clubs or BVCs to think & operate like a business, maintaining records and budgets for better costs-control. Harvesting • Access Improved Storage Technology: Given the highly perishable nature of the product, alternatives to current approaches of harvesting and storage must be identified. Improving access to affordable ice, and introduction of affordable and portable ice boxes are extremely important to retard quality deterioration right at harvest. • Train on Malawi Gold Standard Quality Grading: The Malawi Gold Standard training will also include topics such as product segregation by quality, variety and size, since pricing is determined by these characteristics. • Increase Linkages to Reliable Buyers: Promote and establish “partnerships”-- market linkages either directly with retail chains such as Shoprite or through local commercial farms that supply these stores but are looking to increase their volume. Both channels offer smallholders the opportunity to slowly integrate into the formal fresh-fish value chain. • Increase Consolidation Efficiency: Work with producers to help them understand the value of harvesting on schedule in order to achieve commercial volume at the producer level to control downstream costs. This can be also be supplemented with training on the importance of following a proper feeding regimen, using fish feed to achieve marketable fish size, and emphasizing the value of improving and maintaining quality to secure higher price. Consolidation • Improve Access to Appropriate Tools and Technology: Continue to update processing, storing and transporting technologies in order to increase quality, efficiency, and profits. Outdated technology can lower quality and increase cost, making product uncompetitive. For example access to ice and the introduction of insulated ice-coolers can greatly improve quality of fish and ease of transportation to closest market. Current practice of storing and transportation are severely discounting price. • Product Diversification: While pond-culture is the predominant form of aquaculture in Malawi, cage-

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Value Chain Strategies for Value Chain Improvement Functions culture should also be considered as an approach to increasing the country’s fish supply. Cage- culture uses fairly simple technology & lends itself well to the lifestyle of fisherfolks. • Differentiate Product: Even within aquaculture, it may be necessary to differentiate between cage vs pond-raised fish given that difference in production-system may impact quality. • Access to Mediation for Contract Enforcement: To discourage potential contract breach between fish-farmers, their PGEs and the buyers (whether larger commercial farmers or retailers) and prevent lengthy court battles and costs. • Develop a Commercialization Strategy for Smallholder Aquaculture Industry: While support to improve production is critical, efforts to encourage “market-pull” are equally important. There is need to focus on building a strategy that enables smallholders to shift from subsistence livelihood to producing surpluses, empowers smallholders to produce marketable products, establishes business linkages between producers and buyers, and opens avenues for smallholders to meet market demand. Such a strategy must also foster entrepreneurship, and for this to be successful, it Marketing will be important to help producers and their associations or PGEs to understand that fish-farming is a business, and that business management and marketing are essential skills to profit financially. • Improve Transport/Hauling Material: Access better quality and type of packaging and hauling materials that are cost-effective such as insulated ice-coolers adapted for fish. • Improve Market Orientation: To better understand consumers and competition; to better understand what competitors’ strategies in pricing and distribution are; how good competing products are. Profitable trade can happen with deep understanding of markets and market forces.

5.3. COMMERCIALLY VIABLE OPTIONS AND BUSINESS OPPORTUNITIES This section provides information on potential business options and opportunities that, in the process of addressing constraints, also help improve process or value chain efficiency and maximize open advantages in a commercially viable manner. The viable enterprise options presented below also help expand production to primarily satisfy local demand. They improve the value chain either through the opportunity they create to link production and markets, or they improve the utilization of products, promote preservation, reduce post-harvest losses or create opportunity to expand sales. These enterprises can be either a stand-alone activity or integrated. For example, cage fishing can be combined with fish feed production since the recommended fish feed utilizes commodities produced by smallholders. Ice plant establishment could also combine with the fish supplies activity since the ice plant serves as a point of purchase. These commercially viable opportunities are briefly described below.

CAGE FISHING The business concept: Production of fish (for example Chambo and Mpasa) in cages, by lakeshore and/or river communities, to supplement current fish supply in Malawi. Cage fishing is an uncomplicated technique of raising fish in floating cages in natural or artificial water bodies. With so many water bodies available in Malawi, cage culture offers a unique opportunity particularly for lakeshore communities (owing to the decline in capture fisheries) to enhance their increasingly diminishing source of income. Cage culture provides the perfect opportunity for fisher-folks to engage in aquaculture without departing too much from their lifestyle, which pond culture requires. In fact, cage-fishing may promise to be one of few viable options available to lakeshore communities to improve their livelihood. Cage culture is a promising technology already proven in many Asian countries, as well as in Africa. Cage culture offers many advantages over the pond system. For example, because of natural water circulation, the fish are less likely to taste “muddy” and handling and harvesting are significantly easier. Furthermore, if practiced properly, cage culture can reduce problems encountered in stagnant ponds such as water quality and pollution, as a result of the natural circulation of water between cage and water body where the cages float. Cage culture, if sited appropriately can prevent accumulation of diseases as well. Cage

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culture does not require activities that damage the environment; however it does require access to appropriate natural or artificial lakes, lagoons, rivers, reservoirs or ponds. Furthermore, when owners plan to expand production, cages can be easily added or when cage mooring sites become inappropriate, cages can be easily moved to take advantage of better locations. Moreover, the possibility of installing cages for more than one owner in a single water-body also offers the opportunity to cost-share many commonly needed services such as security, transportation, and marketing. Since cages are often made of plastic wire meshes or nets, the potential to introduce an ancillary enterprise to build cages is also highly possible. The business management framework: Lakefront and river-based communities can add cage fishing as an approach to supplement their income base. Engaging in cage-fish production need not necessarily be a group activity at the club, PGE or beach village committee (BVC) level. This activity lends itself well to individual household-level production, with each household owning three to six cages depending on the income sought. However, it is recommended that members within a club or PGE engage in the same activity to build volume for purposes of transporting and marketing. For this activity, the key role of the PGE or BVC is to serve as a nexus between smallholder producers and processors or buyers, and specialize in representing smallholder-member interest. This nexus or “core”, that is the PGE, provides the framework for building a centralized activity which banks on economies of scale and value-added service, such as bulking, transporting, and marketing. As a producer-owned company, a PGE/BVC becomes the buyer of member-produced good, which is then marketed, earning a profit. The goal for these PGEs is to properly manage, market, and maximize member interest by becoming business-oriented and operating profitable, market-driven enterprises, driving the farm-to-market linkage. In the case of cage farmed-fish, the PGE purchases the fish from its member-producers, conducts preliminary sorting, grading, chilling, and either sells directly to the market or organizes for pick-up with the processor (such as a MALDECO) for a fee. Since MALDECO is interested in picking up volumes of only 1 MT or more at a central location, it will be in the interest of producers to organize themselves in groups to ready the volume for each pick up. The processor then further grades, sorts and distributes to supermarkets and similar retailers. The PGE keeps records and books on the business and, at the end of each year, shares the profit, which is distributed as a dividend to each member-producer to encourage continual participation. When operated in this manner, a PGE becomes viewed not only as a place to sell the fish but also as an investment for additional returns. If a 1 m3 cage with a stocking rate of 60 Kg. is harvested twice a year, then with six cages, a household can harvest two cages every other month, to earn a gross revenue of approximately US $1,000 a year (at MK 200/Kg.). Fish cages, when fabricated locally, can be relatively cheap depending on the size and strength of the material. The average size of fish-cages moored in Zambia’s Lake Kariba and Siavonga district are roughly around 5 to 6 m3.

FINGERLING PRODUCTION The business concept: A fundamental constraint commonly experienced by those engaged in aquaculture in Malawi is the apparent shortage of good quality fingerlings. This business intends to produce fingerlings to partially meet the deficit prevalent in the country. If aquaculture is to be a success, producing 500 to1000 MT/Ha./year and engaging 5,000 fish farmers, along the lines envisioned under the Poverty Reduction Strategy Paper16, then there is need for a steady supply of fingerlings to the various producers in the industry, which would include pond- and cage-fisheries at both the smallholder (small- scale) and large-scale levels. The business management framework: Engaging in fingerling production can be fairly complicated, requiring a higher level of entrepreneurship and investment capability. While this enterprise can be a group activity at the PGE or BVC level, it is highly likely that the BVCs/PGEs are NOT at a stage where they can manage such a venture. It is therefore strongly recommended that this activity be opened to the business community at large for implementation and commercialization. On the cost side, commercial

16 Sloans Chimatiro, Department of Fisheries, March 2006. Status of Aquaculture Development Policy in Malawi: What is the Future? Limbe, Cameroon.

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fingerling production will depend on the scale of the enterprise, but the total cost can run as high as US$ 250,000 over five years for production on average of about two million fingerlings a year.

FLOATING PELLETS (FISH-FEED) PRODUCTION The business concept: Another very important technical constraint limiting the commercialization of aquaculture is the unavailability of quality fish feed, particularly for small-scale producers. Malawi’s small- scale aquaculture is a “low-input/low output” operation, where feed is composed of waste products and phytoplankton produced as a result of manuring. The large-scale enterprises generally utilize commercially available fish feed when accessible, but the cost of feed alone can contribute as much as 65% of the total operating costs. There are other lower-cost alternative feed available in the regional market. For example, Nigeria has successfully commercialized cassava-based floating pellets for catfish and tilapia feed, and the technology, while being affordable, is easily available as well. If the goal of fish-farmers is to maximize pond and cage production, then it is vital that adequate supply of good quality feed be available. Cassava-based floating pellets are cheaper to produce and, because of their composition, reduce the number of feedings required since floating pellets take time to disintegrate allowing the fish to feed continuously on demand. The business management framework: The cassava-based floating pellet production utilizes appropriate technology and raw material (cassava) that is easily available or cultivatable by smallholders. Engaging in cassava-based floating pellet production is suitable only at a group level, as either a PGE or BVC covering a large base of fish-producers, who in turn can become “captive” clients. Moreover, given the agricultural component, the enterprise also has the added advantage of engaging those in the community involved only in agriculture. The key role of the PGE is to be a producer and supplier of cost-effective and yet quality fish-feed to its base of producers. As a producer-owned company, a PGE becomes the buyer of member-produced cassava roots and leaves, to produce the floating pellets, which is then marketed to the fishers, earning a profit. The goal for these PGEs is to properly manage, market, and maximize member interest by becoming business-oriented and operating profitable, market-driven enterprises. The PGE keeps records and books on the business, and at the end of each year, shares the profit, which is distributed as a dividend to each member-producer to encourage continual participation and lowered price. When operated in this manner, a PGE has the promise of becoming an investment opportunity for additional returns. Pelletizing machines are fabricated by BT Ventures, based in Ojoo, Nigeria. These machines utilize both the cold or steam process to produce soft, hard and floating pellets. The technology was developed by BT Ventures in partnership with the International Institute of Tropical Agriculture based in Ibadan, Nigeria. Since the technology promotes the use of local materials, the cost for the entire package (extruder, steam boiler, and dryer) required to produce 1.5 MT (per eight hours) cassava-based floating pellets can run into US$ 3,000 ex-factory (Nigeria). The main ingredients in the feed are mashed cassava, cassava leaves (for protein) and cassava flour.

ICE MAKING PLANT ESTABLISHMENT The business concept: The absence of adequate post-harvest facilities to minimize product loss due to spoilage results in decreased fish quality and product value. Ice preservation is the most common method of minimizing spoilage of fresh fish in most countries. The need for ice to chill fish quickly at harvest is a function of the demand for higher quality fish. But, producers can only provide this service if they have access to such facilities. Unfortunately, the aquaculture sector’s ice needs are not being adequately met by what is available in Malawi17. Where available, the cost of icing is unfortunately often very expensive dissuading the producers from utilizing the required amount of ice resulting in fish losses. Fish-producers therefore generally rely on traders for their ice needs, who consequently dictate the price for their fish.

17 It should be noted that the Lake Malawi Artisanal Fisheries Development Project, funded by the African Development Bank, has plans to establish ice plants in selected localities along the lakeshore. However, the timing and size of the plants are not yet defined.

34 AQUACULTURE SUBSECTOR MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

Furthermore, given the poor road condition, long distance from production sites and poor state of transportation, having several small-scale ice-making plants is better than installing one big industrial operation. This business will contribute to fulfilling the need by producing ice with a 500 Kg. to 2 MT (per 24 hours) capacity at several points with access to electricity and located “centrally”, closer to the cluster of producers engaged in aquaculture. For example one could be placed in Nkhotakota to service those engaged in cage-fishing and pond-fishing and a second one near Chingali to support a group of smallholders there engaged in pond-fish production. The business management framework: A small-scale or mini ice-making plant with a 1 to 2 MT capacity should be sufficient for a community intending to market about 1 to 2 MT of fish per day (a 1:1 fish-ice ratio). There are several small-scale ice-making models in the market that are appropriate for Malawi. Some are even transportable and containerized turn-key type operations. These “mini” modules have the advantage of requiring low capital investment and because they can be moved around, cost of delivery can also be lowered. Simple operations are involved. Engaging in ice-production, even at a small- scale level, is recommended for PGE participation. When there is broad-based ownership, success is likely to be more achievable in such a venture since it will not only meet a need but also give the members or fisher- folks better control of their product marketing and greater benefits as a result of shared profits. In this activity too, the key role of the PGE is to be a producer and supplier of ice blocks primarily to its member-base of fish producers, but it can also serve non-members and the local community with their ice needs. The goal for these PGEs is to properly manage, market and maximize member interest by becoming business-oriented and operating profitable, market-driven enterprises. The PGE keeps records and books on the business, and at the end of each year, shares the profit, which is distributed as a dividend to each member-producer to encourage continual participation and lowered price. When operated in this manner, a PGE has the promise of becoming an investment opportunity with additional returns. As already mentioned, there are various models of small-scale or mini ice-plants available in the global marketplace. The technology is proven. Affordability can be a factor, but price will depend on size and capacity of the unit.

Fisheries Supplies The business concept: The small-scale aquaculture sector supply chain struggles due to the absence of simple but key factors, which, if available, could improve the efficiency of the chain and the value of the product. Because a large percentage of the small-scale producers are resource-poor, the supplies industry has overlooked them. Yet, if simple items such as affordable insulated fish containers were made available, more of them would purchase because they would be able to sell more quality fish. This business will concentrate on helping small-scale aquaculture communities ensure commercial viability of their products (fresh fish) by supplying the producers with key items such as insulated fish containers. Availability of affordable ice-boxes or containers will significantly contribute to incorporating the concept of cold-chain management at the small-scale level as well. Cold-chain management in the aquaculture sector is important not only to maintain aquaculture commercial viability but also to ensure food safety and to safeguard consumer health. As is commonly understood, the quality of fishery products begins to deteriorate immediately after the fish dies due to bacterial growth, enzymatic changes and ensuing chemical actions. High temperature contributes to the speed of bacterial growth and chemical changes in the product. Chilling fish (at 00 C) at harvest with ice and maintaining the low temperature conditions during processing and transporting can greatly retard fish spoilage. The proposed insulated ice-boxes can contribute to maintaining low temperature conditions at the small-scale production level, particularly during transportation. Insulated ice-containers when designed efficiently can keep ice from melting, which in turn helps keep fish cold. At present, there are at least two such boxes available in the market in Malawi: one produced in Zimbabwe by Premier Products and the second produced locally by Nasomba Trucking and Engineering Company. The box produced by Premier Products is promoted by Malawi’s Dairy Board for selling products such as ice cream, milk and dairy products. The “Dairy Board insulated boxes” is able to keep the

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II AQUACULTURE SUBSECTOR 35

products cool for about 12 hours and costs around US$ 383 for a 0.5 m. long box and an additional US$ 110 for the bicycle for transporting the products. The insulated cooler-box manufactured locally by Nasomba Trucking and Engineering Company is currently used only for transporting blood, and is able to maintain a temperature of 20 to 60C for eight hours. The Nasomba cooling-boxes range in price from US$ 100 to US$ 135 (for a 0.07 m3) depending on the size of the boxes. The small-scale aquaculture industry is a prospective markets for both companies. Expansion of this service to the aquaculture sector will eliminate the need for small-scale producers to stay within the confines of their immediate, low-paying and small rural markets since it addresses the issues of improving fish quality and transportation even for rural-based producers. The business management framework: This activity requires setting up a supplies business by serving as distributor of insulated ice-boxes, fish-cages, seine nets, scoop nets, and practically all the paraphernalia required to initiate and maintain a fish-production enterprise. This business is suitable for individual entrepreneurs (e.g. local traders), traders’ association or even producer-groups to take on as a money-making venture. This business could also be combined with either the ice-making venture or the fish feed production activity. As already mentioned, there are various models of insulated ice-boxes already available in the market. The technology is simple and low-cost, but may require slight adjustment to better fit the needs of small- scale aquaculture sector. All options and prospects described above can be further developed, in greater depth, to attract the private sector to invest in the aquaculture subsector. Given the steady demand for fish in Malawi there is opportunity for profit-taking. However, there are constraints and limitations that need to be addressed. An important constraint, for example, is access to finance to implement these opportunities. To meet this financing constraint head-on, there is need within the financial or investment sector to consider innovative approaches to leverage the private sector, such as leasing with a buy-back option. There is also the need to share information, in an open manner, with a wider base of players, to bring all members of the value chain to work toward a more prosperous sector.

5.4. INNOVATIVE PARTNERSHIP MODELS Aquaculture development in Malawi has been ongoing for over 30 years. However, as noted in several studies, the sector has yet to achieve its promise, particularly for the small-scale sector. In the past, food security was the major driver of small-scale aquaculture development in the country. As a result, many of the ponds were located within communities too far from accessible roads or markets. While noble, this production-oriented approach does not promote economic growth for communities in the long run. For aquaculture to take off in Malawi, the sector requires a market-driven approach anchored on sound business principles. For smallholder aquaculture to be successful, the sector must focus on a commercialization strategy that harnesses the commercial potential of smallholders, creates and strengthens relationships between groups of producers and buyers and is secured to ready markets. The innovative partnership models presented below offer this opportunity to smallholders, through collaboration with downstream partners, to become commercial successes by learning to become market- driven, profitable and self-sustaining. When such programs succeed, they not only help arrest the cycle of poverty but also encourage an esprit de corps among players in the value chain, to rise above their circumstances to achieve commercial success and individual prosperity.

SMALLHOLDER – MALDECO ALLIANCE The smallholder – MALDECO alliance is a smallholder aquaculture (cage and pond) commercialization effort designed to establish a partnership model on a pilot basis to test the feasibility of smallholder commercialization in the aquaculture subsector. Under this effort, select PGEs (for pond culture) and BVCs (for cage culture) that participate in this program will be directly linked with MALDECO Ltd., who will serve as the guaranteed market for the smallholder-produced fish.

36 AQUACULTURE SUBSECTOR MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

MALDECO Ltd., Malawi’s largest fishing company, supplies the 147 retail and wholesale outlets of PTC, the country’s largest food retail chain. In addition, MALDECO also caters to the local urban and rural markets given its distribution network covering virtually the entire country. That said, in order to achieve its annual target of 3,000 MT and given the increasingly unfulfilled domestic demand for fish, MALDECO has indicated interest in collaborating with small-scale fish producers to serve as the ready market for both pond-raised and cage-reared fish, particularly popular varieties such as Tilapia/Chambo. MALDECO’s participation and collaboration in the effort is wholly dependent on the ability of the PGEs and BVCs to consolidate the required volume at a central location for collection. MALDECO’s minimum consolidated consignment requirement is 1 MT. Under this pilot effort, smallholders either individually or through groups or clubs will be encouraged to come to a central location with storage technology for keeping fish chilled, safeguarding quality and reducing the burden of selling individually. As part of the program, the “central location” will either be a BVC or PGE. The PGE/BVC will be assisted to establish a centralized fresh fish collection and storage center, equipped with appropriate technology such as a refrigerated storage unit. This kind of bulking and chilling activity will enable the PGE/BVC to increase income to become a viable service-oriented enterprise. Because PGEs/BVCs are producer-owned and operated, profits earned from their value- added activities will be distributed as dividends to active members who market through these local “companies.” In order to meet MALDECO’s minimum volume requirement (of 1 MT) and to spread the cost of the central “fish consolidation” center, this effort will work with the smallholders to establish an entity that is representative of both the participating pond-fishing communities and the cage-fishing communities. The recommended model is for PGEs and BVCs to alternate delivery to the center in order maximize sale from the center. The recommendation is based on the assumption that the PGE representing the pond-culture communities and the BVC representing the cage-culture communities will each be able to collectively consolidate 1 MT at a time for MALDECO pick-up. If each BVC household, for example, is able to harvest 2 cages every week to deliver a total of 100 Kg., then to consolidate 1 MT a week, this program would have to work with 86.7 households to supply 1 MT every week throughout the year (52 weeks). In this model, each household would earn approximately US$ 1,000 a year if each household were to own a total of six cages. For pond-culture, the number of households that needs to be engaged to produce 1 MT a week would be much higher since yields achieved under pond-practice continue to be low. To achieve operational efficiency of the center, it is highly advisable that the small-scale or mini ice- making plant be managed by this same entity, since access to ice is central to the consolidation and storage functions. In addition to keeping records and maintaining books, the entity will also have the responsibility of ensuring the separation of pond-raised fish from cage-raised fish in order to maintain product quality. Furthermore, as in the honey program, COMPASS’ aquaculture commercialization effort will also run on two tracks. The first track will focus on training smallholders, their groups and clubs on quality and expansion of production applying the Malawi Gold Standard Aquaculture Production System. The second track will focus on encouraging smallholders to serve as “outgrowers” producing and delivering fresh fish to their PGE so that the PGE can engage in consolidation, quality control and quality assurance under the right environment. At the collection center, the PGE/BVC will coordinate the transfer of chilled fish to MALDECO, who in turn will further distribute the product to its central region distribution network. As part of track two, PGE/BVCs will be trained on such enterprise essentials as hygiene, production, record and book keeping, financial management, marketing and corporate governance to ensure proper management of the commercial entity. The innovative partnership is between MALDECO Ltd and the PGE/BVC. And because of their contractual relationship, it will also be in the interest of MALDECO to work directly with the PGEs on providing fingerlings when necessary, fish quality, product grading and segregation to comply with processing protocols and buyer specifications. To make the relationship formal (not necessarily legal), it is recommended that a MoU be drawn between MALDECO and BVC/PGE outlining their contractual arrangement. The MoU should also be

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II AQUACULTURE SUBSECTOR 37

accompanied by a “code of conduct” that enshrines on paper each member’s roles and responsibilities in the partnership.

SMALLHOLDER - SHOPRITE COLLABORATION This smallholder pond-culture commercialization effort will focus on working with a group of smallholder fish producers who are already engaged in aquaculture and are reasonably close to major market centers such as Blantyre and Lilongwe, where Shoprite has its larger stores. Under this model, the intention is to enable entities such as fish-farming associations and clubs to provide value-adding services to its members, such as post-harvest handling, consolidation, transportation and delivery of the product either directly to Shoprite stores or to other larger commercial producers who supply Shoprite. As described above, under the commercialization program, this model will follow the same two tracks, where the first track will focus on training smallholders, their associations and clubs on quality and expansion of production applying the Malawi Gold Standard Aquaculture Production System design. The second track will focus on educating the smallholders on the benefits of consolidating the bulking and marketing functions to better serve both the producers and the buyers. The association will also be encouraged to consider utilization of ice to better preserve their fish, use better hauling techniques such as insulated cooling boxes to ensure delivery of quality product in order to fetch a higher price. As part of track two, PGE/BVCs will be trained on such enterprise essentials as hygiene, production, record and book keeping, financial management, marketing and corporate governance to ensure proper management of the commercial entity. The innovative partnership is between Shoprite and the PGE or association. Shoprite managers indicate that across all their seven retail outlets, a total of about 6 to 7 MT of fish a month clear the register. They further emphasize that if supply were to double, sales would double as well. According to Shoprite, fish is in high demand and to date they have been unable to fully satisfy this demand. Given this background, Shoprite is interested in procuring more fish to increase their sale volume. However, they are not keen on increasing their transaction costs by dealing with too many suppliers. It is for this reason, the formation of PGEs is essential to gaining a foothold in the marketplace for smallholder producers. To make the relationship formal (not necessarily legal), it is recommended that a MoU be drawn between Shoprite and the PGE outlining their contractual arrangement. The MoU should also be accompanied by a “code of conduct” that enshrines on paper each member’s roles and responsibilities in the partnership. In addition, because of this program, the same producers will also be better able to directly sell their higher quality product to local markets and improve on their bargaining position with traders.

38 AQUACULTURE SUBSECTOR MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

6. PILOT LOCATIONS All three subsectors discussed in previous segments engage large numbers of Malawi’s rural population living in villages or communities near the county’s natural resources. Many are already engaged directly or indirectly in the production of either honey, mushrooms and/or aquaculture. As pointed out in earlier sections, if options and enterprises are designed thoughtfully and appropriately, all three product categories offer ample opportunities to integrate smallholders and communities in the respective supply chains, not as a charitable concession to disadvantaged groups, but as true partners, adding value through either “on-farm” or “near-farm-gate” activities. Several locations covered programmatically by COMPASS II stand out in terms of suitability and “readiness” to pilot-test the models and innovative partnerships suggested in this report. Many of these locations have communities that have had some training on group formation or are currently already organized into fairly effective groups, clubs or BVCs. Additionally, many of these communities are eager to participate in the commercialization programs since they acutely feel the pressure to seek out feasible opportunities that help them, in the words of one headman in Nkhotakota, “to marry the necessity of earning a living with conserving the resource-base.” More importantly, however, the locations are preferred by the private- sector partners given that some of them are either already operating in these locations or favor these sites over others given the proximity to their respective target markets or procurement centers. All these factors have influenced the selection of these locations presented below, as pilot sites to demonstrate the viability of not only the economic opportunities but also to demonstrate the feasibility of the innovative partnership models that can further enhance competitiveness and increase value chain efficiency. The hope is that with the successful implementation of the pilots in key locations, others in the communities will be able to learn directly or by example.

6.1. NYIKA, MZIMBA The northern region offers opportunities to launch several smallholder commercialization efforts, mainly targeting two subsectors: honey and mushroom. Under the honey sector, the Nyika National Park area offers a nice cluster to test the model given that the smallholders living around the reserve have had some grounding on group formation, are already grouped and are in the process of being trained on the Malawi Gold Standard Honey Production System. Furthermore, Chiwogoro Apiaries is already operational there and is interested in further solidifying its presence and partnership among the communities surrounding the park. Mzimba District also offers the opportunity to further deepen the concept through the mushroom sector since one of the mushroom processors (Chanterella Pvt. Ltd) is keen to work with COMPASS II to organize producer-groups in a manner that is beneficial for both parties (communities and businesses). The formation of strong PGEs in the Chikangawa area is important for the private business since it would lower transaction costs for them while also offering a roadmap to comply with the Department of Forestry requirement. PGEs benefit communities since it can open avenues for them to gain from enterprise and collective trade.

6.2. NKHOTAKOTA Nkhotakota offers an ideal setting for testing at least two models (honey and aquaculture) given the proximity to the Nkhotakota Wildlife Reserve, the Bua River, where the dwindling fisheries resource is being acutely felt by fisherfolks, and Lake Malawi, with its several active BVCs along the lakeshore. The communities in Nkhotakota are well organized into either clubs, groups or BVCs. They have also been actively participating in community-level trainings on various topics and are keen to participate in the pilot activities being proposed in this report. Furthermore, given Nkhotakota’s relatively proximity to Lilongwe, MALDECO Ltd has indicated its interest in working in this area with COMPASS to test the cage and pond-fish farming pilots to cover the

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II PILOT LOCATIONS 39

central region of Malawi. Additionally, the Nkhotakota Wildlife Reserve communities can be linked with EPL for honey, since it already works in the area.

6.3. CHINGALI, ZOMBA The Chingali Integrated Fish Farming Association (IFFA) is a group of 39 fish farmers who collectively own roughly 40 ponds in Chingali, which is close to Zomba. Five of their best farmers have managed to earn as much as MK 40,000 per year in income from fish farming. However, given the lack of proper fish storage and transporting equipment, they have yet to experience the full benefits the sector promises. This association is eager to participate in the pilot since they strongly believe in the possibilities of aquaculture. Furthermore, given that they are already in fish-farming and are well-organized, they are the most “ready” in terms of moving to the next level of operation. Due to the proximity of Chingali to Blantyre, the Chingali IFFA looks attractive in terms of testing the “smallholder-Shoprite” linkage. There is possibility to link the association either directly or through two other larger, commercial fish farms based in Zomba, who also supply Shoprite and could be interested in expanding their supply-base.

6.4. MULTIPLIER EFFECTS If implemented, all three subsectors are likely to generate relatively strong multiplier effects in the communities given the number of forward and backward linkages, the three industries have the potential of stimulating in the pilot areas. Multiplier effects take into account secondary or even tertiary activities that emerge to take advantage of upstream or downstream economic opportunities to either supply inputs or demand outputs as a result of the creation of one anchor industry. Obviously, the wider the range of potential economic activities generated out of the establishment of one anchor industry, the larger is the potential multiplier of such industry. Table 7 presents a select list of linkages that can be generated if investments are made in these three industries. All three industries have the capacity to utilize local resources, labor and locally produced appropriate technology indicating positive net economic impact for the country.

Table 7: Backward and forward linkages

Industry Backward Linkages Forward Linkages

Food processing, wax and candle Tailors, carpenters, tin-smiths, equipment providers, Honey production, mead production, transportation companies, packaging companies, medicinal products Basketry, plastic and packaging companies, spawn suppliers, Food Processing Mushroom substrate suppliers, transportation companies Cassava producers, maize farmers, fishmeal producers, pond- Processed fish, food Processing, and cage-fishing tools (e.g. Fish-cages, scoops, pond-digging livestock feed-mill Aquaculture etc) makers, fish-net makers, ice-plant, fingerling producers, ice-box manufacturers, transportation companies

40 PILOT LOCATIONS MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

7. INVESTOR INTEREST IN THE NATURAL RESOURCES-BASED ENTERPRISE SECTOR Malawi is well endowed with rich natural resources. However, for various reasons, the sector, particularly the non-timber natural resource based products sector, has been unable to attract sufficient confidence from private businesses to either increase the scale or pace of investment. Consequently, the sector has remained relatively under-developed from a commercial point of view. According to several industry players, there are a range of factors that stifle investor interest, and contribute to the present low-level of investment in the sector. Honey, wild mushrooms, timber and fisheries are some subsectors that have recently begun to gain momentum and increased private sector interest. But the pace of investment remains slow even in these subsectors. The biggest factor hindering the growth of investor interest in the sector is one of awareness. The natural resources-based products sector is a relatively unknown sector in Malawi. Given that it is “new” territory, marketing its products to raise consumer awareness and investor interest can be expensive. According to one local investor, because the sector is relatively unknown, even bankable projects get rejected by commercial banks. Secondly, the perception that natural resources-based products markets are not sufficiently robust, and that participation in the sector will require significant upfront investment to develop to a commercial level, is a serious deterrent for private companies since it means building businesses will take time and become expensive. Other factors such as lack of technology, lack of information related to both markets and technology and the lack of basic services such as stable sources of electricity, water and communication combined with the lack of access to affordable operating capital also make it daunting for those interested in investing in this sector. For example, of the ten commercial banks in Malawi, only two lend to small and medium sized businesses in the productive sector. According to one loan officer, banks find it difficult to lend to small natural resources-based product businesses not only because of the high risk they pose given their size but also because the natural resources-based enterprises have been unable to show solid and stable markets. Since many of the natural resources-based enterprises tend to start small, securing financing is a continuing challenge in Malawi. Without financial support, prospects of expanding these enterprises become bleak at best since many require investment assistance. The general macro-economic environment has also played its part in eroding investor enthusiasm in Malawi. Fiscal deficits, unsteady and rising inflation, fluctuation of interest rates and uncertain access to foreign exchange and other such unsupportive regulatory regimes add to uncertainty, making it difficult for either domestic or foreign investments to thrive. Other critical indicators such as ease of doing business reflected by such services as registration of new businesses and dispute resolution also affect an investor’s decision to invest. A study conducted in 2002 by the World Bank lists “ease of doing business” as one of the top four factors influencing investment decision18. In Malawi, for example, the business registration process remains a costly affair in terms of time and effort. While registration is only a five to six step process, it can take anywhere from three to six months just to establish a company in the country. To ease this burden and support investors, the Malawi Investment Promotion Agency was in the process of setting up a “one-stop-shop” but this has yet to materialize in practice. Dispute resolution and the absence of commercial courts is another area that has a dampening effect on investor confidence. Businesses fear that the absence of an arbitration or enforcement body in an environment where the legal system is excessively burdensome, could sway justice to prevail against them even as the time to adjudicate will be long and drawn-out causing expenses to be high. According to one

18 World Bank, 2002. “Top 20 Critical Location Factors.” Study conducted by the World Bank Multilateral Investment Guarantee Agency. Washington D.C., USA.

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II INVESTOR INTEREST 41

businessman, cases often are settled primarily because businesses feel they cannot afford to wait the time required for adjudication. All these factors lead up to increased transaction costs, uncertainty and risk. When these costs are combined with factors such as unreliable supply of inputs and high transportation costs, production costs become high, threatening business competitiveness and viability. So investors turn to more promising sectors or countries where returns are high, payback period quick, and doing business is easier. It is common knowledge that the environment for businesses is challenging and the disincentives for investment are plentiful making it very difficult for any investor to be excited about Malawi. That said, efforts are underway to improve the country’s business climate for increased investment. In December 2004, the private sector represented by the Malawi Confederation of Chambers of Commerce and Industry and representatives from eight key subsectors developed an agenda for change starting with the process of improving the investment climate for both domestic and foreign investors19. The agenda identified 10 priority areas and challenges that needed to be addressed by the Government. By 2005, the Government had begun to incorporate some of the recommendations identified by the private sector. At the sectoral level, there is need to inform the investing public and raise awareness among the financial institutions of the opportunities in the natural resource based products subsector. Developing investment profiles and pre-feasibility studies could be one of many ways to attract investor interest with a view toward jump-starting investment in the subsector.

19 Malawi Confederation of Chambers of Commerce and Industry (MCCCI), December 2004. “Ten Priority Actions for Improving the Business Climate in Malawi.” Blantyre, Malawi.

42 INVESTOR INTEREST MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

ANNEXES

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II ANNEXES 43

44 ANNEXES MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

ANNEX 1: REFERENCES

1. COMPASS II Occasional Paper No. 10, July 2005: Addressing the Business Services Needs for Rural Natural Resources-Based Enterprises in Malawi. USAID, Malawi. 2. COMPASS II Occasional Paper No. 4, March 2005: Decentralization and Fisheries: A Review of Progress, Challenges, and Opportunities for CBNRM in the Fisheries Sector. USAID, Malawi. 3. CBI, October 2005. EU Market Survey 2005: Food Ingredients for Industrial Use. The Netherlands. 4. Field interviews, Various Locations, April 2006, Malawi. 5. CBI, August 2005. EU Market Survey 2005: Preserved Fruits and Vegetables. The Netherlands. 6. FAO, April 2005. Fishery Country Profile: Malawi. Rome, Italy. 7. Shelix Munthali, September 2005. Consultations with Beekeepers and Honey Processors in Northern Malawi. COMPASS II Internal Report; Blantyre, Malawi. 8. Shelix Munthali & Temwa Munkhuwa, January 2006: Honey Retail and Industrial Market Investigations. COMPASS II Internal Report; Blantyre, Malawi. 9. University of Namibia. February 2001: UNDP/UNOPS Regional Project “Promoting Sustainable Human Development in Africa—Mushroom Farming Training Workshop.” Lilongwe, Malawi. 10. FAO, October 2002: Report of the Workshop on the Promotion of Sustainable Commercial Aquaculture in Zambia and Malawi: FAO Fisheries Report No. 733. Lusaka, Zambia. 11. FAO Inland Water Resources and Aquaculture Service (FIRI), 2005. National Aquaculture Sector Overview - Malawi.: National Aquaculture Sector Overview Fact Sheets. FAO – Rome 12. Sloans Chimatiro, Department of Fisheries, March 2006. Status of Aquaculture Development Policy in Malawi: What is the Future? Limbe, Cameroon.

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46 ANNEXES MALAWI COMPASS II ENHANCING ECONOMIC OPPORTUNITIES

ANNEX 2: PERSONS CONSULTED

Person Company/Office Location

Mr. Anthony Mukumbwa Eco Products Ltd. Blantyre Mr. Marise Prinslo Shoprite Blantyre Dr. John G. M. Wilson Fisheries Consultant Blantyre Mr. Abdul Rashid Siku Transport and Distribution Company Blantyre Headman Chuyunda Chingala Integrated Fish Farming Associaton Chingala Mr. Dennis Kanyema Chingala Integrated Fish Farming Association Chingala Mr. Simbane Mangochi Ice Block Plant Mangochi Mr. Lincoln Sangini MALDECO Ltd. Mangochi Mr. Manda Nali Foods Limbe Mr. Mark Kareski Universal Industries Blantyre Mr. Gaiton Muwowo Tambala Foods Products Ltd. Blantyre Mr. Chambalo Mama’s Foods Mzuzu Mr. Alex Banda Uchi Honey LiLongwe Mr. Jameson Barros Mweso Chiwogoro Apiaries Mzuzu Mr. Harrison Kalua Smallholder Coffee Farmers Trust, Mzuzu Honey Mzuzu Mr. Lenson Simumba SBDARA Mzuzu Mr. Banda Simelane Edulis Food Processor., Chikangawa Mzuzu Mr. John Kocen Chanterella Pvt. Ltd., Chikangawa Mzuzu Mr. Trevor Jones Center for Appropriate Technology (CAT) Mzuzu Mr. Orton Kachinjika Chief Fisheries Officer – Extension Lilongwe Dr. Moses Banda Chief Fisheries Research Officer Lilongwe Mr. Joe Mfune Coordinator – Lake Malawi Artisanal Fisheries Lilongwe Mr. Dinesh K. Chugh Vizara Plantations Limited Mzuzu Mr. Vijay Maira Vizara Plantations Limited Mzuzu Mr. Robert Bita Department of Parks and Wildlife Nkhotakota Mr. Tongole-Beekeeping/Mushroom club Nthyoka Village, Nkhotakota Wildlife Reserve Nkhotakota Bua River Fishing Community Nthyoka Village Nkhotakota Mr. Tommy Olsen Norwegian volunteer Nkhotakota Mr. Alan (General Manager) Ryall’s Hotel Food Procurement Department Blantyre Mr. Salama Malawi Export Promotion Council Blantyre Mr. Konakuta Malawi Chamber of Commerce and Industry Blantyre Mr. Khalid Hasan Businessman Blantyre Mr. Arthur Stevens PhytoTrade Blantyre Mr. Banda Trainer Lilongwe Mr. William Chadza Wildlife & Environmental Society of Malawi Lilongwe Mrs. Konyani Malawi Investment Promotion Agency Lilongwe Mr. Christian Dohse Cheetah Malawi Lilongwe Mr. Constantine Chikosi World Bank Lilongwe

ENHANCING ECONOMIC OPPORTUNITIES MALAWI COMPASS II ANNEXES 47