Millennium Cities Investment Working Paper Series

Columbia University

From the SelectedWorks of Karl P. Sauvant

2006

Available at: https://works.bepress.com/karl_sauvant/480/

MCI AND VCC WORKING PAPER SERIES ON INVESTMENT IN THE MILLENNIUM CITIES

No 11/2010

Solar Lanterns in Blantyre, Malawi

Erica Brailey Raquel Fernandez Ed Martin Natalia Sguerra

October 2010

432 South Park Avenue, 13th Floor, New York, NY10016, United States Phone: +1-646-884-7422; Fax: +1-212-548-5720 Websites: mci.ei.columbia.edu; www.vcc.columbia.edu

MCI and VCC Working Paper Series N° 11/2010

Editor-in-Chief: Dr. Karl P. Sauvant, Co-Director, Millennium Cities Initiative, and Executive Director, Vale Columbia Center on Sustainable International Investment: [email protected] Editor: Joerg Simon, Senior Investment Advisor, Millennium Cities Initiative: [email protected] Managing Editor: Paulo Cunha, Coordinator, Millennium Cities Initiative: [email protected]

The Millennium Cities Initiative (MCI) is a project of The Earth Institute at Columbia University, directed by Professor Jeffrey D. Sachs. It was established in early 2006 to help sub-Saharan African cities achieve the Millennium Development Goals (MDGs).

As part of this effort, MCI helps the Cities to create employment, stimulate enterprise development and foster economic growth, especially by stimulating domestic and foreign investment, to eradicate extreme poverty – the first and most fundamental MDG. This effort rests on three pillars: (i) the preparation of various materials to inform foreign investors about the regulatory framework for investment and commercially viable investment opportunities; (ii) the dissemination of the various materials to potential investors, such as through investors’ missions and roundtables, and Millennium Cities Investors’ Guides; and (iii) capacity building in the Cities to attract and work with investors.

The Vale Columbia Center on Sustainable International Investment promotes learning, teaching, policy-oriented research, and practical work within the area of foreign direct investment, paying special attention to the sustainable development dimension of this investment. It is a joint center of Columbia Law School and The Earth Institute at Columbia University.

A separate MCI working papers series on the social sector is also available.

For more information, please refer to the MCI website at: http://www.earth.columbia.edu/mci/ and the Vale Columbia Center website at: http://www.vcc.columbia.edu/.

Copyright © 2010 by the Millennium Cities Initiative (MCI). All rights reserved. Unless otherwise indicated, this working paper may be reproduced, quoted or cited without permission of the author(s) provided there is proper acknowledgement. The responsibility for the contents of this Working Paper remains with the author(s). Accordingly, this publication is for informational purposes only and is meant to be purely educational. While our objective is to provide useful, general information, the Millennium Cities Initiative and the Vale Columbia Center make no representations or assurances as to the accuracy, completeness, or timeliness of the information. The information is provided without warranty of any kind, express or implied. This publication does not constitute an offer, solicitation, or recommendation for the sale or purchase of any security, product, or service. Information, opinions and views contained in this publication should not be treated as investment, tax or legal advice. Before making any decision or taking any action, you should consult a professional advisor who has been informed of all facts relevant to your particular circumstances.

Acknowledgements

As authors, we would like to express our gratitude to the individuals and organizations who took the time to share their resources, knowledge and enthusiasm in the completion of this working paper.

We would like to thank the Millennium Cities Initiative (MCI), the Millennium Villages Project (MVP), the Earth Institute, and the United Nations Development Programme (UNDP) for their invaluable help in completing this project, and in particular Paulo Cunha, Rahul Kitchlu, Nisha Khanduja and Edwin Atkins.

In Malawi, we are particularly grateful to Pempho Nkaonja, the MCI investment specialist in Blantyre.

Additionally, we are very thankful for the help provided by Columbia Business School’s Pangea Adivsors Program, the International Development Club and the Social Enterprise Program, all of whom provided us with immense help to make this research paper possible.

Finally, we would like to recognize and thank all the people who generously agreed to be interviewed for this project and shared their thoughts with us. Their commitment to Malawi is truly an inspiration.

Table of contents

Contents Acknowledgements ...... 3 List of abbreviations ...... 6 Executive summary ...... 7 I. Project overview ...... 8 A. Background and objectives ...... 8 B. Methodology ...... 8 C. Key findings ...... 9 D. Solar lanterns ...... 9 II. Demand assessment...... 10 A. Objectives ...... 10 B. Overview of methodology ...... 10 C. Results of survey...... 11 D. Abstraction to overall demand ...... 12 III. Supply chain ...... 13 A. Overview ...... 13 B. Recommended plan of action ...... 15 IV. Marketing plan...... 16 A. Objectives ...... 17 B. Target markets ...... 17 C. Situation analysis ...... 17 D. Strategies ...... 18 E. Activities ...... 19 F. Tracking and evaluation ...... 19 V. Performance Indicators ...... 20 VI. Risks and challenges ...... 20 A. Potential risks and solutions ...... 20 B. Challenges ...... 21 VII. Conclusions ...... 21 VIII. Appendices ...... 23 X. References ...... 30

Figures

Figure 1: Demand analysis ...... 11 Figure 2: Demand analysis continued ...... 11 Figure 3: Scenario A: One player in Malawi ...... 14 Figure 4: Scenario B: Multi-retail outlets in Malawi ...... 14

Tables

Table 1: Market demand in Blantyre ...... 12 Table 2: Market demand in Malawi ...... 13 Table 3: Statistical analysis ...... 13 Table 4: SWOT analysis ...... 18 Table 5: Performance indicators for facilitation process ...... 20 Table 6: Performance indicators for implementation process ...... 20

List of abbreviations

CI Confidence interval COOP Cooperative organization CBS Columbia Business School HH Households IRR Internal rate of return MCI Millennium Cities Initiative MDGs Millennium Development Goals MERA Malawi Energy Regulatory Authority MIPA Malawian Investment Promotion Agency MOU Memorandum of Understanding MRA Malawi Revenue Authority MRFC Malawi Rural Financing Company MVP Millennium Villages Project MWK Malawian Kwacha NGO Non-governmental organization SMEs Small and Medium Enterprises SWOT Strengths, Weaknesses, Opportunities and Threats analysis UNDP United Nations Development Programme VAT Value added tax

Executive summary

Based on a preliminary survey of low-income residents in the Millennium City of Blantyre, the Pangea team believes that there is sufficient demand to support a market- based approach to supplying and marketing solar lanterns in Malawi’s largest urban market. The team recommends that the Millennium Cities Initiative (MCI) and Millennium Villages Project (MVP) work with the Blantyre City Assembly to pursue partnerships with motivated and capable enterprises in Blantyre. The project partners must coordinate with these enterprises to generate a flexible and sustainable supply chain that is not dependent on international or government aid.

However, significant challenges must be addressed to successfully implement this proposal. First, Malawi’s current banking environment is impeding the importation of goods into Malawi, due to diminishing foreign exchange reserves which restrict liquidity. Second, recent legislation subjects solar products to certain import duties and value added taxes (VAT). To ensure affordability for low-income residents while maintaining the viability of the supply chain, the project partners must work with key stakeholders in Malawi to pursue a change to the legislation, or secure a special exemption. Nevertheless, based on an assessment of Blantyre’s market opportunity and business environment, we believe introducing solar lanterns in Blantyre is executable and viable. The project generates attractive returns - according to our estimations, the importer and retailers would have an estimated internal rate of return (IRR) of 19.7% and 8.59%, respectively. We believe these levels can be achieved even under very conservative scenarios.

I. Project overview

A. Background and objectives The Earth Institute at Columbia University launched the Millennium Cities Initiative (MCI) in 2006 to illustrate the importance of an effective, integrated approach to achieving the Millennium Development Goals (MDGs) in urban areas of sub-Saharan Africa. The MCI consists of investment and social sector components, which work together to improve the livelihoods of residents in the eleven Millennium Cities. The MCI helps the cities to create employment, improve public health program planning and implementation, stimulate enterprise development, strengthen market linkages, and foster economic growth – especially by increasing flows of foreign and domestic investment to the cities and countryside – in order to eradicate extreme poverty, the first and most basic MDG. The MCI also works to strengthen farm-to-market linkages between the nearby Millennium Villages and regional capitals and, on the basis of careful needs assessments and costings carried out by the MCI, helps urban stakeholders in each municipality to devise integrated development strategies designed to reflect and realize their top priorities. MCI is working with the Millennium Villages Project (MVP) to introduce solar lanterns in Blantyre, the main economic center of Malawi. Even in grid-connected areas, outages from load shedding are a daily occurrence. To this end, solar lanterns are a relatively new “green” technology that has the potential to positively impact energy consumption patterns in many communities around the world. They are an efficient, safe, cheap and environmentally friendly alternative to paraffin, candles and other basic (and sometimes dangerous) lighting sources. In the Millennium Village of Mwandama in Zomba district, the MVP has successfully established a private sector-led solar lantern project working with the supplier d. Light. A household survey showed that people in the community saved an average of one hundred Malawian Kwacha (MWK) per week and were highly satisfied with their purchases. The study also suggested that the lanterns pay for themselves in less than a year.1 In order to create a business plan for the introduction of solar lanterns in Blantyre, a team from Columbia Pangea Advisors (Pangea), a consulting organization run by Columbia Business School (CBS) students, undertook a study with the following objectives: • Investigate demand for solar-powered lanterns in Blantyre, Malawi; • Recommend an appropriate and reliable supply chain to deliver lanterns to consumers in Blantyre; and • Suggest subsequent steps to scale up distribution.

B. Methodology The team performed a study of Blantyre to determine the demand for solar-powered lanterns in the largest urban center in Malawi. Specifically, the team investigated existing

1 See Atkins, et al., “Off-grid energy services for the poor: introducing LED lighting in the Millennium Villages Project in Malawi,” Energy Policy, 38 (2010), pp. 1087–1097.

residential demand for solar lanterns utilizing a market survey administered during a visit to the city in January 2010. Based on the results of the market study, the team identified options for marketing solar lanterns to Blantyre’s residents. In addition to framing the demand-side of an urban solar lantern market, the team determined an appropriate supply chain to reliably supply solar lanterns to the identified target market. The team worked with contacts provided by MCI to identify potential wholesalers and retailers in Blantyre. In order to do this, a Pangea team member traveled to Blantyre between January 6, 2010 and January 13, 2010. Three additional team members traveled to the city between March 8, 2010 and March 12, 2010. During these visits, the team members met with the Malawi Investment Promotion Agency (“MIPA”), local importers of renewable energy products, and potential retailers. The team also conducted a preliminary demand survey, and visited the local cooperative organization (“COOP”) set up in Mwandama to manage the distribution of solar lanterns in the village.

C. Key findings 1. Demand – Based on the results of the demand survey, the residents of Blantyre show interest in purchasing solar-powered lanterns. 2. Supply chain – Prospective business partners currently located in Blantyre are adequate to import and distribute the lanterns. The candidate pool includes partners with the level of capability, expertise, and interest required to become part of the project. Although there are a number of candidates to retail the product, the retail model should include more than one channel, due to the market characteristics and the economics of the project. Ideally, the primary partner should be capable of importing, distributing, and retailing the product to its own outlets as well working in partnership with other retailers.

D. Solar lanterns The solar lantern introduced to the residents of Blantyre should provide high-quality light. Some top lantern models, such as the d. light Nova 200, the model distributed by the COOP in Mwandama, can double as a mobile phone charger. D. Light is based in China and imports through Dar es Salaam, Tanzania.2 We recommend a solar lantern model that can provide up to twelve hours of bright light on a day's charge, and can recharge a mobile phone in as few as two hours. A recommended model would also provide white light projected at a wide angle, and would be able to effectively illuminate an entire room. The recommended model should include an efficient, portable solar panel with a lengthy outdoor cable for convenient solar charging and should be encased in a sturdy housing unit that is water resistant and protects the interior from dust and large insects. It should come with an ergonomically designed handle and top strap so users can hang the device. Although the initial assessment has been done with the recommended d. Light 200 model, it is worth noting that there are other alternative models coming on the market that might be better alternatives for the long term. Although we are confident that the d. light Nova 200 lantern would be appropriate for an initial phase, we would recommend considering alternative models as the business model gains strength.

2 For more information on d. light, see .

II. Demand assessment

The objectives of the demand assessment were the following:

A. Objectives 1. Given the successful introduction of solar lanterns to Mwandama, the team endeavored to determine if demand of a similar product exists in an urban area such as Blantyre. 2. While more urban residents are connected to an electrical grid than rural ones, anecdotal evidence suggests that a significant percentage of the population continues to require some form of an off-grid lighting source. Thus, a key objective of the demand assessment was to confirm or refute this premise. 3. To help provide a framework for marketing and supply chain strategies, the demand study would be used to generate an estimate of the market potential for solar-powered lanterns.

B. Overview of methodology To accomplish the objectives, the team created a survey covering two areas in Blantyre City. The survey was conducted by members of the Blantyre City Assembly using a questionnaire framework developed by Pangea. The questionnaire (see Appendix C) consisted of thirty questions and aimed to understand household composition (number of family members, marital status, etc.), income (monthly income level, occupation, etc.), energy use (connectivity to electrical grid, types of lighting used in household, monthly investment in paraffin fuel, etc.), and interest in the solar-powered lanterns (statement of interest, number of lanterns that would be purchased at MWK 5,800,3 willingness to rent or lease the product, etc.). Each surveyor was equipped with a solar lantern device, including a solar panel and cell- phone connector, to demonstrate the product. After demonstrating the capabilities of the product, the surveyor would execute the questionnaire. To measure urban demand, the lowest-income market was targeted in the survey, as the working assumption was that the greatest utility would be gained by the lowest income residents as a substitute for current use of paraffin lanterns and other traditional forms of energy. Additional demand surveys would be required to establish an estimate of the demand among middle and upper class citizens of Blantyre. For the purposes of this demand assessment, these markets were generally ignored. To measure the impact of demand based on in-house connectivity to the electrical grid, two low-income communities with access to the electricity network were chosen for the survey, Ntopwa and Mbayani. Both of these communities are high density squatter areas. The Mbayani area is estimated to have over 2,000 households with access to the electrical grid. However, only 40% of these households have electricity in their homes. The other 60% generally find it too expensive to pay the electricity installation fee (which is about MWK 28,000) to the power supplier.

3 Conversion used throughout this document of MWK 148 per US$ as of March 31st, 2010.

The Ntopwa area is smaller, with slightly less than 1,000 households, all of which have access to the electrical grid. However, similar to Mbayani, roughly 60% of households opt out of electrical grid connectivity due to the high upfront cost of installation. Overall, approximately 10% of households in the Ntopwa area have in-house connectivity to the electrical grid.

C. Results of survey When asked, “At MWK 5,800, do you believe this product provides value to you?” the following answers were provided by the sixty three subjects of the survey: Figure 1: Demand analysis

Mbayani: Does Product Ntopwa: Does Product All Respondents: Does Provide Value Provide Value Product Provide Value at MWK5,800? at MWK5,800? at MWK5,800?

No, 5, 16%

No, 14, 44% No, 19, 30% Yes, 18, 56% Yes, 26, 84% Yes, 44, 70%

Source: MCI survey conducted by Pangea Advisors (January 2010). Based on these results, a disparity seems to exist in demand for the solar-powered lantern between the two communities. To test the hypothesis that connectivity to the electrical grid is a factor in a potential consumer’s desire to purchase the product, a regression on the data demonstrated the following: • With 97.5% confidence, there is a negative correlation between connectivity to the electrical grid and a willingness to pay for the product. The ninety-five (95%) confidence interval is negative fifty percent (-50%) to negative five percent (-5%). The coefficient of correlation is -0.271, with a P-value of 0.019. • Thus, in determining the overall demand for the product, we recommend segmenting the market into on-grid residents and off-grid residents.

Figure 2: Demand analysis continued

Sample without connectivity Sample with connectivity to 97.5% confidence interval: Sample Without Connectivity Sample With Connectivity 97.5% Confidence Interval: to electrical grid: percentage electrical grid: percentage of likelihood of demand from a to Electrical Grid: to Electrical Grid: Likelihood of Demand of HH that would purchase HH that would purchase HH with connectivity to grid Percentage of HH that Percentage of HH that from a Household with lantern lantern would Purchase Lantern would Purchase Lantern Connectivity to Grid

Non-Purchaser, 6, 18%

Non- Purchaser, Purchaser Non- 37% 13, 45% Purchaser, Purchaser 16, 55% Purchaser, 63% 28, 82%

Source: MCI survey conducted by Pangea Advisors (January 2010).

Qualitative evidence from interviews with respondents and surveyors suggest that some minimum level of education is required for people to understand that a solar panel can recharge the battery. Also, although previous government advertising campaigns trumpeted the benefits of solar-powered energy, this was the first time most of the respondents had seen a solar lantern in use. Due to some inconsistencies in the way qualitative information was collected, the survey provided a limited ability to establish deterministic relationships between household composition and level of interest in the product. Thus, we have ignored some of the qualitative results in our measurement of overall demand. However, given that 70% of all respondents were willing to purchase the product at MWK 5,800, we are confident that demand exists for this product.

D. Abstraction to overall demand Utilizing the preliminary demand survey findings, we assume that, at MWK 5,800, demand exists for this product from 37% of households with connection to the electrical grid. Due to the small sample size of the survey, we also bring down the ratio of purchasers from non-connected households from 82% to 70%, which was the proportion of respondents willing to purchase the product at that price. Using the 95% confidence interval for likelihood to purchase, and estimating that 1.5 lanterns are purchased per household off the grid and 1 lantern per household on the grid, we estimate the total market in Blantyre for this product is between 123,000 and 179,000 lanterns. Table 3 provides a detailed breakdown of the sample results by on-grid and off-grid residents. Applying the lower bound of the confidence interval to the overall population of Blantyre, we estimate that, based on a conservative estimate, 30% of households in Blantyre are connected to the electrical grid, and approximately 84,000 households in Blantyre would purchase the solar lantern product. (See below Table 1 for calculation of total market demand in Blantyre city.)

Table 1: Market demand in Blantyre Total Population/ Total # % That Total HH that Lanterns lantern Blantyre Population household households would buy would buy / HH demand On-grid 219,750 5 43,950 37.10% 16,293 1.0 16,293 Off-grid 512,750 5 102,550 69.50% 71,312 1.5 106,968 Total households with demand in Blantyre 146,500 59.80% 87,605 123,261 Years to full market penetration 3 Approximate average monthly demand 3,424

Source: MCI survey conducted by Pangea Advisors (January 2010). Abstracting these same results to the entire Malawian population, we estimate that 1.6 million households would purchase a lantern at MWK 5,800. Assuming ten years for a distributor to penetrate the entire market, we estimate that demand outside Blantyre would equate to approximately 17,000 units per month.4 (See below Table 1 for calculation of total market demand in Malawi.)

4 We assume that during the first three years, Lilongwe and Mzuzu would be the initial targets of distribution along with Blantyre. Following the first three years, an average of 3 or 4 municipalities

Table 2: Market demand in Malawi Total

Population/ Total # of % That Total HH that Lanterns Lantern Blantyre Population Household Households would buy would buy / HH Demand On-Grid 595,000 5 119,000 37.10% 44,116 1.0 44,116

Off-Grid 11,305,000 5 2,261,000 69.50% 1,572,270 1.5 2,358,405 Total households with demand in Blantyre 2,380,000 67.90% 1,616,386 2,402,521 Years to full market penetration 10

Approximate Average Monthly Demand 16,597

Source: MCI Survey conducted by Pangea Advisors Team (January 2010).

Table 3: Statistical analysis Resident Access to Grid? Yes No Total Sample size 29 34 63 Probability of purchase 55% 82% 70%

Number of households (000s) (Team estimates) Blantyre 44 103 147 Malawi 119 2,261 2,380

95% Confidence interval - probability of purchase Upper CI 73% 95% Lower CI 37% 70%

a Total Blantyre market size (000s) Upper CI 32 146 179 Sample probability 24 127 151 Lower CI 16 107 123 Total Malawi market size (000s) Upper CI 87 3,228 3,315 Sample probability 66 2,793 2,859 Lower CI 44 2,358 2,403

a Assumes 1.5 lanterns purchased per HH off-grid; 1 lantern per HH purchased on-grid.

Source: MCI Survey conducted by Pangea Advisors (January 2010).

III. Supply chain

A. Overview There is an identified market in Malawi and significant interest from importer organizations and NGOs to develop a solar lantern scale-up project in Blantyre. After thorough analysis, we have identified two scenarios that would best facilitate the importation, distribution and final sale of solar lanterns to end consumers at a

could be included in the business plan. However, this timeline and business plan is subject to revisions by future project partners.

reasonable price. These recommendations are based on a careful assessment of meetings with Malawian importers and NGOs in January 2010 and March 2010.

Figure 3 - Scenario A: One player in Malawi

Selected Warehouse/ Manufacturer Retail: importer: distribution: END (China or (Malawi) (Malawi) (Malawi) BUYER elsewhere)

Source: Pangea Advisors. Scenario A includes a manufacturer and one key player, labeled the “selected importer” in Malawi. The main challenge is to identify the selected importer that is best positioned to import, warehouse, distribute, and retail the solar lanterns. This one-importer scenario was chosen to minimize the markups reflected in the final price of each lantern (detail on pricing can be found in Appendix A). We estimate, based on a price of US$22 per unit (cost to the manufacturer) from China that the end user would be charged between US$35 and US$40 to purchase one unit. Furthermore, by working exclusively with one company in multiple roles, the process would be relatively streamlined at the onset.

Figure 4 - Scenario B: Multi-retail outlets in Malawi

Retail: NGO (Malawi)

Manufacturer Selected Warehouse/ distribution: Retail: END importer: Selected (Malawi) (Malawi) BUYER importer

Retail: Millennium Villages (Malawi)

Source: Pangea Advisors. Scenario B differs from Scenario A at the retail level of the supply chain, as it targets multiple retail channels. By diversifying the retail network, this initiative will have a higher likelihood of penetrating the broader market demand, including the identified demand from the MVP endeavor in Mwandama. After meeting with the Mwandama COOP, we learned that they would ideally like to order 400 lanterns per month. By supporting the expansion of the MVP mission and supplying the COOP with those lanterns, we assure the importer that half of the total order will have a buyer.

An NGO or another microfinance institution would be the third retailer in the model. The NGO would be able to inventory lanterns at its headquarters, functioning as a warehouse to supply its members. The participation of a micro-finance institution in such a scenario would prove critical given that a majority of people surveyed in the city expressed interest in acquiring lanterns by credit. This strategy would both effectively allocate lanterns to different target markets and introduce competitive pricing. Similar to Scenario A, based on the $22 cost from the manufacturer, the retail price would be between US$35 and US$40 per unit. Given potential channel conflict, we propose considering a retail price ceiling on the lanterns.

B. Recommended plan of action Of the two proposals presented, we believe that Scenario B is more likely to achieve MCI’s final objective – a supply chain that efficiently and affordably delivers solar lanterns to people in need throughout Blantyre and, eventually, throughout Malawi. In our view, this process will create a sustainable business model in the medium- to long- term. By using several retail options, this strategy will thoroughly penetrate the market in Blantyre, supplying more pockets of demand throughout the city. 1. Pilot program This project would scale up over time. In a first phase, we foresee an initial order of 750 units, of which 400 would be supplied to MVP, 300 to the selected importer’s retail outlets and the remaining 50 to the retail NGO. This pilot phase would be completed within 6-9 months of delivery, and will give the supply chain participants an opportunity to work out any issues. We expect strong demand, and therefore, plan to import one full container by year two. 2. Time frame Before this first step of ordering and importing the lanterns commences, a number of outstanding issues must be resolved, including: 1. A request for a VAT waiver on imported solar lanterns from the Malawi Revenue Authority (“MRA”). 2. A confirmation on unit pricing from the manufacturer. 3. Supplier agreements reached among all the entities. Once final agreements are reached, importation of the goods can commence. This process can begin as soon as T + three months. Air shipment will take three to four weeks, so the product can arrive in Malawi by T + four months. The importer must work with the retail system to project the demand, and reorder with the manufacturer before inventory runs out. The timing and quantity of the inventory replenishment will require open communication among the entire supply chain to ensure success. 3. Immediate next steps: • VAT issue: A letter to the MRA requesting a VAT waiver for this initiative has been drafted. This letter must now be circulated to enlist the support of the Malawi Energy Regulatory Authority (MERA) and MIPA in discussions with the Director of Energy and MRA.5

5 Note that as of September 2010, it appears unlikely that the VAT exemption will be granted.

• Confirm players involved: Members of the Pangea Advisors team have reached out to all the aforementioned potential players. The team is still awaiting information from some of these potential partners, including company information, written statements of interest, and demonstration of capabilities. Once these responses are procured, MCI can work with other partners to analyze the responses and determine the best roadmap forward. In particular, MCI can help facilitate discussions between all of the major players, verify participation, outline next steps, and confirm a time frame for the commercial launch of the project. • Reach out to Blantyre City Assembly officials for support with initiative. This is a key step that must be given high priority. • Discuss partnership with MVP. MCI should collaborate closely with MVP in the planning and execution of all steps. • In particular, the Pangea Advisors team recommends that MCI facilitate initial discussions between key players. If MCI’s assessment is consistent with the Pangea team’s preliminary assessment, discussions can be facilitated between:

o The manufacturer and selected importer o Selected importer and selected distributor/retailer, and o Selected importer and MVP Another potential option would be to organize a facilitation workshop between all parties. • Memorandum of Understanding (“MOU”): as the parties negotiate supplier arrangements, MCI can help facilitate the MOU process if necessary.

IV. Marketing plan

The objective of a marketing plan for the solar lanterns initiative in Blantyre is to support the distribution of the lanterns themselves, to educate consumers about the benefits, and to guide customers to locations to purchase the lanterns. The marketing plan should outline simple yet effective initiatives that target the appropriate population. The plan will help people, particularly those at the lowest-income levels, recognize the need for lanterns, provide them with useful background information, and communicate the benefits of an innovative alternative to their current lighting sources. Furthermore, the marketing plan should support the sales process by engaging potential consumers and persuading them to buy the product.

In our view, the importer should spearhead the marketing plan. The marketing plan would not differ significantly between urban and rural areas, as individuals located in both regions have access to newspapers, radio, and other forms of advertising, like billboards and posters. The majority of marketing efforts would take place during the spring and summer when liquidity is usually greatest and people have savings from harvests to purchase lanterns.

In addition, if the City Assembly shows interest in collaborating on the project, it could also potentially provide marketing support.

A. Objectives 1. To educate and create awareness about solar lanterns in Blantyre 2. To communicate the benefits of switching from traditional lighting sources to solar lanterns 3. To inform potential customers about lantern availability in their communities 4. To communicate financing opportunities available to acquire the lanterns

B. Target markets For the initial phase, the model would target areas in Blantyre where access to the electrical grid is not feasible or where connectivity is expensive (e.g. Mbanyani). Within these communities, the plan should target both households and commercial locations that need lighting. For future phases, the model could be replicated in other urban and rural areas of Malawi.

C. Situation analysis

The SWOT analysis in Table 1 below summarizes the strengths, weaknesses, opportunities and threats of the business plan to introduce solar powered lanterns to Blantyre. The internal components refer to factors that are controlled by the players involved in this initiative and the external factors apply to issues that cannot be controlled by the parties involved in the project.

Table 4: SWOT Analysis

Internal External Strengths Opportunities • •

Proven track record in Mwandama Enter a new market as leader • Experience and support from the • Initiate a community-led business model Mwandama COOP • Deliver a product that people want • Established partnership with the • Target underserved market manufacturer • Provide an evident need recognized by • Positives (+) Part of larger initiative (MCI and MVP) everyone • Provide a business model that is readily replicable Weaknesses Threats • Doesn’t offer immediate return to • Lack of funds participants o Potentially complicated financing • Expansive retail network unavailable arrangements • Possible partners haven’t worked with • Potential reluctance by some people to

each other invest aggressively at an early stage ) - • Limited experience dealing with • Potential quality issues could be government agencies catastrophic to supplier support • Low-cost competition o Limbe electronics shops import

Negatives ( cheap products directly o Residents want to pay less o Once quality issues surface, could hurt demand for product o Could be mitigated if the manufacturer invests heavily in branding

Source: Pangea Advisors.

D. Strategies Households – In selling to households, marketing efforts must highlight the advantages that lanterns provide in terms of additional hours of lighting (e.g. entrepreneurship, academic development, etc). The sale could be performed by sales representatives who offer merchandise door to door, at local markets or in small local businesses. Small businesses – To recruit small businesses to sell the product, marketing efforts must highlight the opportunity to promote solar power usage and be an example for the target community. These small businesses would not only be doing demonstrations but also selling the product to other small businesses in the area.

E. Activities 1. Newspaper advertising a. Definition: Marketing ads published in popular local newspaper(s). b. According to respondents working in the industry, newspaper advertising has proven to be successful in increasing awareness for this type of product. c. The estimated cost of putting an ad in the local newspapers runs from MWK 35,000 for a quarter page ad in black and white to MWK 54,000 for a quarter page in color. 2. Radio advertising a. Definition: Short sale pitches with catchy jingles announcing the product. b. Even low-income residents in Blantyre have radios. c. The estimated cost of running 30-second spots on the radio is MWK 3,500, which is much more affordable than newspaper advertising. 3. Public relations a. Definition: Educational demonstrations of about 5-6 people spearheaded by a community leader or the City Assembly. b. Given the clients targeted, another marketing activity could involve focus groups with community leaders or the City Assembly sharing their own experience by word of mouth. Reliable community leaders can be effective outlets for educating and persuading residents. c. Ideally, this activity should be designed in such a way that it doesn’t generate costs for the project. However, the importer may consider free samples to certain factions of the communities. d. Involve the City Assembly in public relations and outreach. 4. Promotional ads (billboards, posters, etc) a. Definition: Color printed, promotional ads located in strategic locations such as Asian shops, the weekly market and food stores. b. These advertisements would be strictly informative in nature and help to increase awareness and interest among the target market. c. The estimated cost of distributing posters in the local shops is MWK 45,000 for 500 copies.

F. Tracking and evaluation In order to track the progress of the marketing plan, possible indicators could be established, including: • Total sales; • Sales by channel; • Sales growth.

V. Performance Indicators

Performance indicators could be established to track key project objectives and the implementation process, as outlined below.

Table 5: Performance indicators for facilitation process

Objective Target Date Party/parties responsible MIPA letter MRA – tax benefit Selection of importer Selection of retailers Completion of first order

Source: Pangea Advisors.

Table 6: Performance indicators for implementation process (to be given to importers and retailers)

Objective Indicator Target Tax charge • % Sales Total sales • MWK • Units Sales by sales • MWK channel • Units Sales growth • (Sales month2 – Sales month1)/Sales month1 * 100% • Units Sales growth per • Per channel: (Sales month2 – Sales month1)/Sales month1 channel • Units Repeat purchase • Lanterns/household Warranties • Warranties claimed / Total units sold claimed

Source: Pangea Advisors.

Below are suggested monthly sales projections for this initial phase based on the assumption that the importer will place an order with the manufacturer every three months. This implies having an inventory of at least 2 or 3 months of sales.

M1 M2 M3 M4 M5 M6 M7 M8 M9 M10 M1 M12 Total Y1 Total Y Growth Rate 0% 0% 50% 0% 0% 60% 0% 0% 25 10% 10% Estimated Units Sold Per Month 500 500 500 750 750 750 1,200 1,200 1,200 1,50 1,650 1,815 12,315 21,780

VI. Risks and challenges

A. Potential risks and solutions

1. Manufacturer: Based on initial feedback, there is a high level of acceptance and enthusiasm for the product. However, there is also some skepticism in particular about the battery and the bulb life. To mitigate this risk, sufficient assurances must be received from the manufacturer, including a commitment to high quality

standards and product warranties. It is worth noting that warranties would only work if there is a chain backwards from consumer to manufacturer.

2. Importer: With only one manufacturer and one importer, the entire supply chain could be at risk if operational issues arise. Additionally, if demand exceeds expectations, the supplier might not be able to meet the requirements.

3. Retailer: Even if the business is a huge success in Blantyre, the profit margins at the retail level might not provide sufficient incentive to sell the product in other areas of the country. If this happens, the long term objectives of the project would be compromised. To mitigate this risk, an assessment of the retailer’s commitment to the long-term expansion of the project is crucial.

B. Challenges The foreign exchange situation in Malawi has been raised as one of the biggest challenges for the business at this time. The country’s level of foreign exchange reserves is very seasonal as it depends on income generated by tobacco, tea, and cotton crops, so the country frequently suffers from shortages. Because the Malawi Central Bank maintains a fixed exchange rate that requires significant bank reserves, the seasonal capital flows into and out of the country will hamper the free movement of goods into the country. Currently, even though importers have the local money to pay suppliers, they are unable to do so because they can’t procure the foreign exchange. The short-term solution is to wait for the crops to harvest; however, the long-term solution is to promote an increase in exports and international investors entering the country. However, given that the supply chain depends on the importation of goods from abroad, this will be an ongoing challenge for the importer. Additionally, a new legislation was approved and made effective in January 2010 that subjects some solar products to import duties and VAT taxes. Without a change in the legislation or an appeal for an exemption granted, the substantially higher costs could jeopardize the viability of this project and make the product unaffordable for the target client.

VII. Conclusions

After thorough analysis, the Pangea team recommends introducing solar lanterns to the Millennium City of Blantyre, Malawi. Based on a survey, the demand for solar lanterns in low-income neighborhoods justifies introducing the product to the city’s residents. Additional analysis will be required to identify the neighborhoods where demand for the lanterns is highest. However, based on the results of the demand survey, residents in low-income squatter communities without connectivity to the electrical grid are most likely to express interest in purchasing the product. Introduction of lanterns will not only benefit the immediate users, but also the entire community by reducing carbon emissions, providing energy to low income people through promoting entrepreneurship, and enhancing educational opportunities by providing additional study hours.

Additionally, the team’s assessment of the local business community in and around Blantyre suggests that local institutions are in place to generate a flexible and viable supply chain. Blantyre’s importers have the motivation and capital required to invest in

21 such a project. Additionally, a number of NGOs in Blantyre have the mandate, membership, and capital required to provide retail assistance for the project.

To maximize the long-term benefits of this initiative, we suggest pursuing the partnerships outlined in Scenario B, discussed in Chapter II. The supply chain partners identified in this chapter have shown great interest in the project, and MCI should reach out to these potential partners for further discussions.

VIII. Appendices

A. Pricing structure

Proposed business plan in Blantyre Cost from manufacturer $ 22.0 Cost to import (S&H) $ 2.0 Import duties $ - Landed cost - Blantyre, Malawi $ 24.0 Distribution and warehouse cost $ 5.0 Importer/distributor markup $ 5.0 Price to local 'retailer' / COOP markup $ 34.0 Marketing $ 1.0 Retailer' / COOP mark up $ 5.0 Price to consumer in cash $ 40.0 VAT @ 16.5% $ 7 Final price to consumer $ 46.6 6

Economics for importer / distributor Cost from manufacturer $ 22.0 Cost to import and distribute $ 7.0 Markup $ 5.0 Price to retailer $ 34.0 Margin to importer 17.24%

IRR for importer / distributor 19.66%

Economics for retailer Cost from manufacturer $ 34.0 Marketing costs $ 1.0 Markup $ 5.0 Price to consumer (without VAT) $ 40.0 Margin to importer 14.29%

IRR for retailer 8.59%

Source: Pangea Advisors estimations (March 2010).

6 There are other scenarios where price to retailer and prospective importer could impact pricing models. Price variability is highly possible and should be considered when revising this model.

B. Letter from Malawi Revenue Authority

Source: Malawi Revenue Authority.

C. Sample survey

Source: Pangea Advisors.

D. Pro forma projections7

Mo.1 Mo.2 Mo.3 Mo.4 Mo.5 Mo.6 Mo.7 Mo.8 Mo.9 Mo.10 Mo.11 Mo.12 Total Yr. 1 Total Yr. 2 Growth rate 0% 0% 50% 0% 0% 60% 0% 0% 25% 10% 10% Estimated units sold per month 500 500 500 750 750 750 1,200 1,200 1,200 1,500 1,650 1,815 12,315 21,780

Cost from manufacturer 11,000 11,000 11,000 16,500 16,500 16,500 26,400 26,400 26,400 33,000 36,300 39,930 270,930 479,160

Cost to import (S&H) 1,000 1,000 1,000 1,500 1,500 1,500 2,400 2,400 2,400 3,000 3,300 3,630 24,630 43,560

Duties, VAT, etc ------

Landed cost - Blantyre, Malawi 12,000 12,000 12,000 18,000 18,000 18,000 28,800 28,800 28,800 36,000 39,600 43,560 295,560 522,720

Distribution and warehouse cost 2,500 2,500 2,500 3,750 3,750 3,750 6,000 6,000 6,000 7,500 8,250 9,075 61,575 108,900

Importer/distributor markup 2,500 2,500 2,500 3,750 3,750 3,750 6,000 6,000 6,000 7,500 8,250 9,075 61,575 108,900

Price to local retailer 17,000 17,000 17,000 25,500 25,500 25,500 40,800 40,800 40,800 51,000 56,100 61,710 418,710 740,520

Marketing 500 500 500 750 750 750 1,200 1,200 1,200 1,500 1,650 1,815 12,315 21,780

Retailer' / COOP Markup 2,500 2,500 2,500 3,750 3,750 3,750 6,000 6,000 6,000 7,500 8,250 9,075 61,575 108,900

Total revenues 20,000 20,000 20,000 30,000 30,000 30,000 48,000 48,000 48,000 60,000 66,000 72,600 492,600 871,200

Assumptions

1. We assume that the cost from the manufacturer is $22 per lamp, which is the same price that the Millenium Villages Project is currently working with as o 2. Our estimations on Cost to Import and Distribution and Warehouse are based on the discussions held with the potential importers and distributors. 3. We assume that the initiative will maintain the "no import duties" benefit as it is a renewable energy related project. 4. Our estimations for the Importer and Distributor markup are based on the requirements expressed by them in order to get involved in the business 5. Marketing Expense estimations are based on costs for placing newspaper ads, radio announcements, and posters distribution. 6. Retailer markup estimations were defined based on accepted margin ranges 7. Growth rates were estimated based on conversations with MCI team, assuming that orders are made to manufacturer every three months 8. We assume that sustainable, long term demand levels per month are reached by the end of the first year. 9. We assume no economies of scale, but we are aware significant savings can be achieved.

Source: Pangea Advisors.

7 Note that as of September 2010, it appears unlikely that the VAT exemption will be granted.

X. References

Edwin Atkins, et al., “Off-grid energy services for the poor: introducing LED lighting in the Millennium Villages Project in Malawi,” Energy Policy, 38 (2010), pp. 1087–1097.

D. Light webpage, http://www.dlightdesign.com/home_africa.php (last visited April 2010).

Malawi Revenue Authority webpage, http://www.mra.mw (last visited June 2010).

MCI AND VCC WORKING PAPER SERIES ON INVESTMENT IN THE MILLENNIUM CITIES

No 10/2009

INVESTMENT OPPORTUNITIES IN MEKELLE, TIGRAY STATE, ETHIOPIA

Bryant Cannon

December 2009

432 South Park Avenue, 13th Floor, New York, NY10016, United States Phone: +1-646-884-7422; Fax: +1-212-548-5720 Websites: www.earth.columbia.edu/mci; www.vcc.columbia.edu

MCI and VCC Working Paper Series No 10/2009

preparation of various materials to inform foreign investors about the regulatory framework for investment and commercially viable investment opportunities; (ii) the dissemination of the various materials to potential investors, such as through investors’ missions and roundtables, and Millennium Cities Investors’ Guides; and (iii) capacity building in the Cities to attract and work with investors.

Correspondence should be directed at any of the editors.

A separate MCI working papers series on the social sector is also available.

For more information, please refer to the MCI website at: http://www.earth.columbia.edu/mci/ and the Vale Columbia Center website at: http://www.vcc.columbia.edu/.

Copyright © 2009 by the Millennium Cities Initiative and Vale Columbia Center on Sustainable International Investment. All rights reserved. Unless otherwise indicated, this working paper may be reproduced, quoted or cited without permission of the author(s) provided there is proper acknowledgement. The responsibility for the contents of this Working Paper remains with the author(s). Accordingly, this publication is for informational purposes only and is meant to be purely educational. While our objective is to provide useful, general information, the Millennium Cities Initiative and the Vale Columbia Center make no representations or assurances as to the accuracy, completeness, or timeliness of the information. The information is provided without warranty of any kind, express or implied. This publication does not constitute an offer, solicitation, or recommendation for the sale or purchase of any security, product, or service. Information, opinions and views contained in this publication should not be treated as investment, tax or legal advice. Before making any decision or taking any action, you should consult a professional advisor who has been informed of all facts relevant to your particular circumstances.

2 Table of Contents Acknowledgments ...... 6 List of abbreviations ...... 7 Executive summary ...... 9 Chapter 1. The broader context ...... 13 A. Country background...... 13 B. The region ...... 14 C. The economy ...... 15 D. Markets ...... 15 E. Trade facilitation ...... 16 F. Exports ...... 16 G. Imports ...... 17 H. Foreign direct investment ...... 18 Chapter 2. Investing in Mekelle ...... 20 A. Introduction ...... 20 B. Mekelle economy ...... 21 C. Reserved areas of investment...... 21 1. Reserved for the Government ...... 21 2. Reserved for joint investment ...... 21 3. Reserved for domestic investors ...... 21 D. Investment permit ...... 22 1. Required minimum capital ...... 22 2. Required minimum capital (approved sectors) ...... 22 E. Federal level investment incentives ...... 23 1. Exemption from customs duty ...... 23 2. Duties ...... 23 3. Exemption from income and profit tax ...... 23 4. Tax holiday ...... 23 F. Regional investment incentives ...... 23 1. Industrial zones ...... 23 2. Approved investments for free land lease ...... 24 3. Agricultural investments ...... 24 4. Land as collateral ...... 24 5. Grace period for lease ...... 24 6. Reduced lease price...... 25 G. Guarantees to investors ...... 25 1. Guarantee against expropriation ...... 25 2. Loss carried forward ...... 25 Chapter 3. Opportunities for investors ...... 26 A. Sectoral selection criteria and analysis ...... 26 B. Livestock ...... 26 1. Milk products ...... 27 2. Meat products...... 29

3 3. Leather goods ...... 30 4. Animal feeds ...... 34 C. Poultry ...... 35 D. Fishery...... 35 E. Apiculture ...... 36 F. Vegetable and fruit processing...... 39 G. Agriculture ...... 41 1. Oilseeds ...... 41 2. Cotton for textile production ...... 44 3. Forestry ...... 45 H. Agricultural niche products...... 46 1. Spice industry...... 46 2. Floriculture ...... 47 3. Incense and wild gum ...... 47 4. Essential oils ...... 47 5. Cactus products ...... 48 I. Agricultural support industries ...... 48 J. Tourism ...... 49 K. Manufacturing ...... 51 L. Mining ...... 54 M. Service industries ...... 56 1. Information technology ...... 56 2. Health and education...... 57 Chapter 4. Mekelle operating environment...... 58 A. Infrastructure ...... 58 B. Energy ...... 58 C. Water and sanitation ...... 59 D. Transport ...... 60 E. Telecommunications ...... 61 F. The financial sector ...... 61 G. Mekelle Industrial Zone ...... 62 H. Land administration ...... 62 I. Human resources ...... 64 J. Bureau of Capacity Building ...... 64 K. Tigray Bureau of Rural Development and Agriculture ...... 65 L. International development efforts in Mekelle ...... 65 M. Holding companies in Mekelle ...... 66 1. EFFORT Corporation ...... 66 2. Dejenna Endowment ...... 67 N. Doing business in Mekelle ...... 67 1. Tigray Investment Office (TIO)...... 67 2. Tigray Agricultural Marketing Promotion Agency (TAMPA) ...... 67 3. Tigray Bureau of Trade and Industry...... 68 4. Tigray Development Association ...... 68 5. Mekelle Chamber of Commerce ...... 69

4 Chapter 5. Conclusion ...... 70 Appendix 1: Project proposals available at Tigray Investment Office ...... 71 Appendix 2: Guidelines for environmentally sound investments ...... 73 Appendix 3: Legal framework for investments...... 75 Appendix 4: List of interviews ...... 77 References ...... 78

Tables

Table 1: Value of major exports ...... 17 Table 2: Value of major import items ...... 18 Table 3: Investment projects approved and potential employment creation ...... 19 Table 4: Number of approved projects and investment capital ...... 19 Table 5: Business survey results for manufacturing industries ...... 52 Table 6: Reasons for manufacturers working below full capacity ...... 52 Table 7: Transport distances from Mekelle and Addis Ababa ...... 60

Boxes

Box 1: African Growth and Opportunity Act ...... 16 Box 2: Dairy investments...... 28 Box 3: Meat production investments ...... 30 Box 4: Leather industry ...... 33 Box 5: Animal feed processing ...... 34 Box 6: Honey investment...... 39 Box 7: Agro-processing investment...... 41 Box 8: Edible oil investment...... 44 Box 9: Cotton investment ...... 44 Box 10: Forestry investment ...... 45 Box 11: Irrigation investment ...... 48 Box 12: Tourism investment ...... 51 Box 13: Manufacturing investments ...... 53 Box 14: Metal and engineering investment ...... 54 Box 15: Mining investment ...... 56

Figures

Figure 1: Ethiopia and Mekelle in brief ...... 12

Maps

Map 1: Map of Ethiopia ...... 12

5 Acknowledgments

The author would like to express his gratitude to the many individuals who shared their time, resources and enthusiasm in the completion of this working paper. The author would like to particularly thank Millennium Cities Initiative (MCI) Co-Directors Dr. Susan Blaustein and Dr. Karl P. Sauvant, and MCI Senior Investment Advisor Joerg Simon, for the opportunity to work in Mekelle. In addition, the author would like to recognize the significant contributions of Paulo Cunha, Zachary Arney, Tatyana Gershkovich, and Lisa Sachs throughout the editing process and publication of the document. In Ethiopia, the author is particularly grateful to Aberash Abay, MCI’s social sector specialist, who was invaluable in collecting information for this report. The author is also indebted to the numerous government officials in Mekelle who provided support and helped facilitate the research. Finally, the author would like to recognize and thank all the people who generously agreed to be interviewed for this project and share their thoughts. Their commitment to Ethiopia is truly an inspiration.

6 List of abbreviations

ACP African, Caribbean and Pacific Group of States AGOA African Growth and Opportunity Act AU African Union BOAM Business Organization and Access to Markets (of the SNV) BPR Business process reengineering BWUD Construction and Urban Development Bureau CBB Construction and Business Bank of Ethiopia CBE Commercial Bank of Ethiopia CIP Capital investment plan COMESA Common Market for Eastern and Southern Africa CSA Central Statistics Agency of Ethiopia DBE Development Bank of Ethiopia DECSI Dedebit Credit and Savings Institution EBA Everything but Arms Initiative (of the EU) ECA Ethiopian Customs Authority EEPCO Ethiopian Electric Power Corporation EFFORT Endowment Fund for Rehabilitation of Tigray EIA Ethiopian Investment Agency ELICO Ethio-Leather Industries EPA Ethiopian Privatization Agency ERA Ethiopian Road Authority ETB Ethiopian birr EU European Union FAO Food and Agriculture Organization FDI Foreign direct investment GIS Geographic information system GSP Generalized System of Preference GTZ German Development Agency HACCP Hazard analysis and critical control points HIPC Highly Indebted Poor Countries ICS Interconnected (national grid) system ICSID International Centre for the Settlement of Investment Disputes ICT Information and communication technologies LDC Least developed country MCI Millennium Cities Initiative MVP Millennium Villages Project MDRI Multilateral Debt Relief Initiative MIGA Multilateral Investment Guarantee Agency (of the World Bank) MIT Mekelle Institute of Technology NBE National Bank of Ethiopia NEPAD New Partnership for Africa's Development NGO Non-governmental organization OAU Organization for African Unity ODA Official development assistance

7 PLC Public limited company REST Relief Society of Tigray SCS Self contained (national energy) system SME Small and medium-sized enterprises SNNPR Southern Nations, Nationalities, and Peoples Region SNV Netherlands Development Organization TAMPA Tigray Agricultural Marketing and Promotion Association TIO Tigray Investment Office TRRA Tigray Region Road Authority UGDP Urban Governance and Decentralization Programme UNECA United Nations Economic Commission for Africa UNIDO United Nations Industrial Development Organization UNMEE United Nations Mission to Ethiopia and Eritrea USAID United States Agency for International Development USTR United States Trade Representative WFP World Food Programme WTO World Trade Organization

8 Executive summary

Mekelle,1 a rapidly developing city in northern Ethiopia, is located about 780 km from the capital, Addis Ababa. Established nearly 150 years ago by Emperor Yohannes, the city is nestled in Ethiopia’s temperate highlands, in the heart of a region that traces its origins back to the ancient Axum Empire that once controlled Red Sea trade (4th century BC – 10th century AD). The city maintains a proud history of many religions, particularly Orthodox Christianity, dating back to the 4th century AD. Mekelle was largely ignored in the latter half of the 20th century by Ethiopia’s ruling feudal and socialist governments, but began to experience an economic and cultural rejuvenation with the election of a democratic government in Ethiopia in the early 1990s.

Over the past two decades, Mekelle has experienced rapid growth as the capital of the Regional State of Tigray. Due to long-term business development plans aimed at creating optimal market conditions, the city has become the home for many industries, agro-processing companies and educational centers. With an educated work force and a significant manufacturing base, the city is poised for sustainable economic growth. This working paper is meant to alert investors to Mekelle’s potential and to provide an overview of the investment conditions the city offers.

With a population of 215,546,2 Mekelle is one of Ethiopia’s largest cities and among the closest to the ports of Djibouti, which are used for nearly all of Ethiopia’s import and export trade on the Red Sea. The city is located at the hub of a road system that connects all major cities in the region. The recently constructed Alula Aba Nega International Airport provides for cargo and passenger needs. In addition, road rehabilitation and development projects are creating additional links to nearby cities and agricultural areas.

There are numerous opportunities for investment in and around Mekelle. One area of particular interest is agriculture and agro-processing. The region is well known for its superior livestock and honey, and a wide variety of fruits and vegetables. Livestock-based agro-processing can provide a myriad of opportunities for investors in the dairy, meat and leather industries. This region is likewise ideal for harvesting high quality honey and producing wax. As the largest producer of both livestock and honey in Africa, Ethiopia has the experience and supply volume necessary to process goods for domestic and international markets.

Mekelle is also well situated for attracting tourism. The city is at the center of a variety of cultural, historical, religious, and adventure tourism options. Erte Ale, one of the world’s few active volcanic lakes, lies east of Mekelle, while the city itself is surrounded by fantastic rock- hewn churches that rival the more well-known rock temples of Jordan’s Petra. This area is also home to one of the most important Islamic holy sites outside of Mecca, located in the town of Negash. The northern Ethiopian region offers tourists many cultural opportunities. In addition to tourism operations, there is significant opportunity to develop hospitality facilities focused on hotels and restaurants, as Mekelle lacks facilities to meet expected future demand. Further opportunities abound for investments in cotton, textiles, floriculture, spices, and mining.

1 The city is also spelled “Mek’ele” or “Mekele,” although for consistency’s sake, this report will use the spelling “Mekelle” unless referring to a particular organization or institution that utilizes a different spelling of the city. 2 Government of Ethiopia, Census 2007 (Addis Ababa: Central Statistical Agency, 2008).

As a result of these investment opportunities, Ethiopia is well poised to experience rapid economic growth. As one of the largest populations in Africa, it possesses a mostly untapped domestic market. Internationally, it is a party to numerous trading agreements, including the Common Market for Eastern and Southern Africa (COMESA) and the US African Growth and Opportunity Act (AGOA). As a member of the African, Caribbean and Pacific Group of States (ACP), it receives preferential treatment from the European Union. It also qualifies under the Generalized System of Preferences (GSP), which gives it preferential access not only to the EU, but also to many other developed markets, including Japan. Ethiopia’s access to the US market is guaranteed by AGOA, which covers more than 6,400 items.

Despite much optimism, significant challenges to business operations remain. Ethiopia is a landlocked country and, consequently, transportation for imports and exports, while mostly dependable, can be slow. Some government agencies still suffer from bureaucratic inefficiencies; power supply can be erratic; and the land-acquisition process can be complex and time- consuming. However, institutions at all levels of government have begun business process reengineering (BPR) efforts to identify weaknesses and promote investor interests. Ultimately, with a large domestic market and a business friendly environment, Ethiopia is one of the most attractive places to invest in East Africa.

Map 1: Map of Ethiopia

Source: Reliefweb, http://www.reliefweb.int/rw/fullMaps_Af.nsf/0/E85F2E6F11D6AB1785256E7D0058CFE3/$File/cia_eth2 10404.jpg?OpenElement (last visited November 2009).

11 Figure 1: Ethiopia and Mekelle in brief3

Ethiopia in brief Official name: Federal Democratic Republic of Ethiopia. Capital: Addis Ababa. Form of Government: Multi-party democracy. Head of State: President Girma Wolde-Giorgis. Head of Government: Prime Minister Meles Zenawi. Location: East Africa, on the Horn of Africa. Surface area: 1,127,127 square kilometers. Climate: Temperate in the central highlands; hot in the lowlands. There are two rainy seasons from March to April and June to September. Population: 74 million (2007). Religions: Christian, 50 percent; Sunni Muslim, 40 percent; traditional African and other, 10 percent. Languages: Amharic is the official language while English is widely spoken. GDP: US$ 19.43 billion – at purchasing power parity; US$ 62.19 billion (2007). GDP per capita: US$ 249 – at purchasing power parity; US$ 800 (2007). Currency: Ethiopian birr (ETB). Exchange rate: US$ 1 = ETB 9.94 on 1 January 2009 (UN operational exchange rate).

Mekelle in brief Location: 780 km north of Addis Ababa, Ethiopia’s capital. Climate: Temperate, 16° to 30° Celsius year round. Notable features: Former capital of the Ethiopian empire, now the sixth largest city in Ethiopia and capital of the Regional State of Tigray as well as a religiously significant area for Ethiopian Orthodox Christianity. Population: Mekelle, 215,546 (2007); Tigray Region, 4.5 million (2008). Religion: Christian, 93 percent; Muslim and others, 7 percent. Languages: Amharic, Tigrigna, English. The primary ethnic group in the area is Tigrian. Main economic activities: Cement, timber, mining, light manufacturing, agro-processing, wholesale and retail trade.

3 Millennium Cities Initiative, Earth Institute, Columbia University, drawing on various sources at http://earth.columbia.edu/mci.

12 Chapter 1. The broader context

A. Country background Ethiopia is the largest country in East Africa and nearly twice the size of Texas. Its growing population of nearly 74 million (2007) makes it the second most populous country in Africa, recently passing Egypt.4 The majority of the population (85 percent) is rural and engaged in agricultural production, spanning 18 agro-ecological zones and five traditional climatic zones, including alpine (Wurch), temperate (Dega), subtropical (Woina Dega), tropical (Qolla), and desert (Berha).5

As a landlocked country, Ethiopia shares boundaries with Eritrea to the north, Kenya to the south, Somalia and Djibouti to the east, and Sudan to the west. The Great Rift Valley runs from the northeast to the southwest and separates the Central and Eastern Highlands. Altitudes range from 110 m below sea level at Dallol in the northeast to over 4,600 m at the Semien Mountains in the northwest. Surrounding the highlands, which constitute 56 percent of the total area of the country, are extensive lowlands with altitudes of less than 1,000 m. Most economic activity takes place in the highlands.

Although the shortest distance to the seacoast is about 60 km from Ethiopia’s northeastern border, this route is still inaccessible due to the delicate relationship with Eritrea. The next closest route is through Djibouti and covers over 700 km.

Ethiopia’s population is comprised of about 80 ethnic groups of which the Oromo is the largest (nearly 40 percent of the total population), while the Amhara ethnicity accounts for an additional 20 percent. The country’s major religions are Ethiopian Orthodox Christianity (45 percent) and Islam (40 percent), but many ethnic groups in the south also practice traditional animist religions (10 percent). The remainder of the population (5 percent) identify themselves as Catholic or Protestant.

As one of only two African countries never colonized (Liberia being the other), Ethiopia maintains a unique role in Africa’s history. It has long been considered as a source of Pan- African culture and leadership. When the Organization for African Unity (OAU) was established in 1963, Addis Ababa was chosen as its headquarters. After the OAU was disbanded in 2002, the African Union (AU) chose to maintain its secretariat in Addis Ababa. Addis (as it is generally known) is also home to the United Nations Economic Commission for Africa (UNECA) and a major hub of non-governmental (NGO) activity on the continent. While Addis Ababa possesses a population of five million, the next seven largest cities, including Mekelle, are mainly regional and administrative centers with populations ranging from 100,000 to 400,000.

Ethiopia’s history can be subdivided into three noteworthy periods of political and economic development. The country was initially a quasi-feudal society governed by the Solomonic Kings, whose rule began in the 13th century and lasted until 1974, when King Haile Selaisse (1928– 1974) was deposed by the communist-backed Derg regime, a military junta led by Mengistu

4 Government of Ethiopia, Census 2007, op. cit. 5 Teigist Lemma, “Case study on Ethiopia” (Geneva: UNCTAD, 2006), mimeo.

13 Haile Mariam. This event marked the beginning of the second stage of political and economic development characterized by the socialist policies and nationalization projects often blamed for the negative growth experienced by the country throughout the 1980s. Finally, the dissolution of the Soviet Union and dwindling support from Russia allowed several Ethiopian rebel groups to overthrow the Mengistu regime in 1991, and orchestrate a remarkably peaceful transition of power. By 1995, the country had adopted a new constitution that fostered a multi-party democracy and peaceful elections. However, the country’s initial growth and influx of foreign investment were only temporary. By 1998, the country was at war with Eritrea and suffering from an economic downturn at home.

Since the end of the 2002 recession, Ethiopia’s economy has registered an average real GDP growth rate of 11.8 percent. In 2006/20076 (the most recent year for which data are available), the estimated real GDP growth stood at 11.4 percent, with agriculture, services and industry registering growth rates of 9.4 percent, 13.5 percent, and 11 percent, respectively. Over the past several years, there has been a boom in the service sector that now represents 41.2 percent of GDP. Construction activities have shown a similar increase, while agriculture as a share of GDP has decreased from 56.7 percent in 1996 to 46.3 percent in 2007.7

The Government has also taken several policy and legal measures to sustain growth. Since it was first adopted in 1992, the Investment Act has been revised several times to remove obstacles to foreign direct investment (FDI) in Ethiopia. Privatization has been ongoing since the Republic’s founding in 1995, and the Government has sold many mismanaged and poorly performing companies to private investors. While privatization remains a priority, the Government continues to explore policies and laws to create a more enabling environment for economic growth and poverty reduction.

B. The region Historically, Ethiopia has been isolated politically and culturally from its East African neighbors. This has changed somewhat in recent years as the Government has committed itself to supporting regional trade and broadening interactions with other African countries. Ethiopia is now a member of the Common Market for Eastern and Southern Africa (COMESA) and home to the Africa Union (AU).

In addition, Ethiopia’s skilled and affordable labor market is helping the country quickly expand its export production into Sudan, Kenya, and Djibouti. From traditional crops such as coffee and oilseeds to energy, meat, and wood products, Ethiopia is increasingly utilizing its diverse natural resources and burgeoning private sector to become a leading force among East African countries.

6 Note: Ethiopia still uses the Julian calendar. Accordingly, its year begins on Sept 11th and ends on Sept 10th. While the business and financial sectors use the western (Gregorian) calendar, some governmental accounting is done in accordance with the Julian calendar. The Julian calendar lags behind the Gregorian calendar by 7-8 years (e.g. the Ethiopian year 1999 would span 2006/2007). 7 Government of Ethiopia, Annual Report on Macroeconomic Developments: Macro Economy Policy and Management Department (Addis Ababa: Ministry of Finance and Economic Development, 2007).

14 C. The economy The Ethiopian economy has experienced strong economic growth since transitioning to a multi- party democracy. Since 1995, it has posted a per capita growth rate of 2.4 percent.8 Since 2003, the economy has witnessed an average growth rate of 11.8 percent. Inflation, on the other hand, reached as high as 41 percent in 2008.9

Because of Ethiopia’s recent growth, it has also avoided the need for extensive debt servicing as the country has benefited from the Highly Indebted Poor Countries (HPIC) initiative,10 as well as the Multilateral Debt Relief Initiative (MDRI). Reduced debt servicing and increased 0fficial development assistance (ODA), which amounted to US$1.3 billion in 2007 (of which 53.2 percent came from the US), have also greatly benefited the economic climate.

The Ethiopian Government has continued to emphasize infrastructure modernization, particularly with respect to roads and hydropower. With the completion of several high profile energy projects, Ethiopia is expected to begin exporting electricity to Sudan, Djibouti and Kenya in the coming years. Although agriculture is an important component of the Ethiopian economy (it employs 85 percent of the workforce), its share as a percentage of GDP is small relative to industry.

Privatization has also played an important role in helping develop skills and industries. Of the 360 public enterprises chosen for privatization, 294 were offered publicly by the Government between 1994 and the end of October 2006; 230 properties (worth approximately US$ 460 million) were sold; and 18 were returned to their original owners. Ten retail shops and one state farm have closed. None of Ethiopia's public utilities have been privatized to date, although the Government is looking for foreign investor partners for select telecommunications services. At the moment, the Government has 91 state enterprises under its control.11

D. Markets As one of Africa’s most populous countries, Ethiopia has one of the largest domestic markets on the continent, although the purchasing power of the population is still limited. The country’s nearly 80 million people create a large pool of semi-skilled to highly qualified professionals. By virtue of its membership in COMESA, Ethiopia enjoys regional market access through preferential tariffs. Potential economic reforms within the African Union would lead to greater trade liberalization among member states and provide further market access. Ethiopia’s proximity to the Middle East also offers potential market and export opportunities.

In order to liberalize its markets further, Ethiopia has begun the accession process to the World Trade Organization (WTO). The country also qualifies for preferential access to European markets under the European Union’s Everything but Arms (EBA) initiative and to US markets

8 See Globalis. Ethiopia: GDP per capita annual growth rate. http://globalis.gvu.unu.edu/indicator_detail.cfm?IndicatorID=45&Country=ET. 9 United Nations Economic Commission for Africa, Economic Report on Africa (Addis Ababa: UNECA, 2009). 10 In November 2001, the IMF and World Bank agreed on a US$ 1.9 billion debt relief program. 11 Government of the United States of America, Ethiopian Investment Climate (Washington, DC: US Department of State, 2008), http://www.state.gov/e/eeb/ifd/2008/100861.htm (last visited November 2009)

15 under the African Growth and Opportunity Act (AGOA). Along with COMESA and the AU, Ethiopia is also a member of the New Partnership for Africa's Development (NEPAD). Furthermore, a broad range of manufactured goods from Ethiopia are entitled to preferential access in Austria, Canada, Finland, Japan, Norway, Sweden, the US, and most of the European Union (EU) under the Generalized System of Preference (GSP). No quota restrictions are placed on more than 3,000 export items currently eligible for GSP treatment.

Box 1: African Growth and Opportunity Act

The US African Growth and Opportunity Act (AGOA) was signed into law on May 18, 2000. It is meant to encourage trade with Africa by offering certain industries preferential access to US markets outside of free-trade agreements. AGOA covers some 6,400 items, including textiles and apparel. The AGOA Acceleration Act, signed into law on July 12, 2004 and known as AGOA III, extends this preferential access until September 30, 2015.

Eligibility for AGOA benefits is determined annually on the basis of a review by a committee chaired by the United States Trade Representative (USTR). In order to qualify for AGOA, countries are required to make progress toward establishing a market economy and the rule of law, and commit to policies to reduce poverty and combat corruption. Currently, 41 sub-Saharan countries are eligible for AGOA, including Ethiopia, which became eligible on October 2, 2000.

There is a different set of AGOA eligibility requirements for apparel (ready-made garments), an item of special interest to a number of African countries. Ethiopia became apparel eligible on

August 2, 2001. From 2005 to 2007, exports increased from US$ 5.2 million to US$ 9.0 million.

Sources: AGOA website: www.agoa.gov/index.html and www.agoa.info/index.php?view=trade_stats&story=apparel_trade.

E. Trade facilitation The Ethiopia Customs Authority (ECA) has made a major effort in recent years to increase transparency; its valuation methodologies and procedures are available to the public on its website.12 It has also made a great effort to streamline services to importers. Customs clearance time, which used to take 43 days on the average, has been reduced to less than a week in most cases. On November 18, 2006, Ethiopia and Djibouti signed a multi-modal transport agreement that enables the effective utilization of the port of Djibouti for the next 20 years, as well as door- to-door cargo transit between the two countries.13

F. Exports During the 2006/07 fiscal year, export earnings amounted to US$ 1,185.65 million. Compared with the 2005/06 fiscal year, total earnings increased by about US$ 185.4 million (18.5 percent) in 2006/2007. Sectors with the greatest earnings increases included flowers (192.3 percent),

12Government of Ethiopia, Ethiopian Customs Authority, http://www.telecom.net.et/~ethcusau. 13Government of the United States, Ethiopian Investment Climate (Washington, DC: US Department of State, 2008), op. cit.

16 pulses (90.2 percent), gold (50.5 percent), and live animals (33.4 percent). Meanwhile, earnings from oilseeds and meat products both declined by 11.4 percent and 16.5 percent, respectively. During the 2006/2007 fiscal year, coffee (US$ 424.2 million), oilseeds (US$ 187.4 million) and gold (US$ 97.4 million) comprised 59.8 percent of export earnings.14

Exemptions from customs duties or other taxes levied on imports are granted for raw materials necessary for the production of export goods. Three duty incentive schemes have been introduced to promote a wide variety of businesses and production types: duty drawback; bonded manufacturing warehouse; and voucher schemes. Although the schemes have been met with mixed results, on the whole they have proven to be highly beneficial to the efficient conduct of business throughout the country.

Table 1: Value of major exports (in US$ million)

G. Imports During the 2006/2007 fiscal year, the value of imports was US$ 5,127.62 million. Machinery and transport (vehicles) goods was the largest import sector, with US$ 1,863.19 million (36.3 percent of the total merchandise import), followed by petroleum products at US$ 856.84 million (16.7 percent of the total) and manufactured goods at US$ 854.96 million (16.7 percent). Chemicals, and food and live animals account for 8.6 percent, and 4.0 percent of the total import bill, respectively, with others accounted for about 17.3 percent. Compared with the same period for the previous fiscal year, the total import bill for all commodities except for food and live animals increased by about US$ 534.81 million (11.6 percent).15

While there are very few prohibited imports (armaments, drugs, coins, radioactive materials, used clothes), several broad categories of products are subject to special permission by federal ministries, including foodstuffs, chemicals, pharmaceuticals, agro-chemicals such as fertilizers, and road vehicles and communication equipment. Prohibited export items include ancient

14 Government of Ethiopia, Annual Report on Macroeconomic Developments, op. cit. 15 Ibid.

17 treasures, indigenous seeds and plants, raw hides and skins, and live animals (unless a special license has been obtained).

Ethiopia requires that all importers hire registered Ethiopian nationals as official import or distribution agents. The importers or agents are required to apply for an import license with the Ministry of Trade and Industry as well as a foreign exchange account with the National Bank of Ethiopia. To conduct business effectively and participate in local tenders, it is advisable for foreign firms to appoint local agents to represent their businesses in Ethiopia.

Table 2: Value of major import items (in US$ million)

H. Foreign direct investment Mekelle’s ability to attract investment is to a large extent tied to Ethiopia’s business and investment climate. FDI into Ethiopia grew with the liberalization of the economy in the early 1990s and the current government is seeking to eliminate further constraints on FDI by establishing an enabling environment for foreign investors. In 1998, authorities began to promote Ethiopia more vigorously as a location for FDI, and in 1999, Ethiopia’s first investment guide was published. The Ethiopian Investment Agency (EIA) is responsible for approving FDI projects for both the pre- and post-investment phases.16

The liberalization of the economy has led to improved incentives and better marketing of the country. The gradual shift to privatization began with the sale of small retail outlets and medium- sized hotels and restaurants; two government agencies, the EIA and the Ethiopian Privatization Agency (EPA), oversaw the sales. The telecommunication and energy sectors have also begun attracting foreign investment. The privatization of state farms and agro-industrial plants has proven problematic in large part due to the competing claims for allocation of land titles by regional authorities. Having learned from past experiences, Ethiopian authorities and the IMF have agreed to carry out an economic program to privatize additional state-owned enterprises, including hotel chains, state farms, and plantations.

During the 2006/2007 fiscal year, 6,472 investment projects were approved (a 10.7 percent increase over the previous year), with capital invested amounting to nearly US$ 10 billion (a 16.9 percent increase over the previous year). Of this number, 5,322 projects with capital

16 The pre-investment phase refers to the process of obtaining an investment certificate. The post-investment phase refers to the approval provided by the EIA for operations, such as vehicles.

18 amounting to approximately US$ 5 billion were licensed to private domestic investors. This was a slight increase from the previous year both in terms of the number of projects and amount of capital. By contrast, the number of projects approved for foreign investors reached 1,150 with capital amounting to US$ 5 billion. Despite strong capital increases in total domestic investment, 2006/2007 represents the first year that total approved foreign investment capital exceeded total approved domestic investment capital. In fact, in 2006/2007, foreign investment was 50.2 percent of total approved investment – a significant increase from just 32.3 percent during the previous year.17

Table 3: Investment projects approved and potential employment creation18

Table 4: Number of approved projects and investment capital

These numbers are quite encouraging and signal an environment conducive to private investment. Of the total capital approved during 2006/2007, about 40.8 percent (US$ 4.1 billion) was concentrated in Addis Ababa, 27.2 percent (US$ 2.7 billion) in Oromia, 13.5 percent (US$ 1.4 billion) in Amhara, and 5.9 percent (US$ 500 million) in the southern region, according to the Ministry of Finance and Economic Development. Tigray received only marginal investment as a percentage of the total investment.19 In comparison, actual FDI inflows into Ethiopia amounted to US$545 million in 2006 and US$254 million in 2007. The annual FDI inflows into Ethiopia averaged US$ 402.25 million from 2004-2007.20

17 It is important to remember that these numbers indicate approved investments and that it is difficult to project what percentage of approved investment will be actualized. 18 EFY 1998 spans the 2005/2006 calendar years; EFY 1999 spans 2006/2007. 19 Government of Ethiopia, Annual Report on Macroeconomic Developments, op. cit. 20 United Nations Conference on Trade and Development (UNCTAD), Ethiopia Country Fact Sheet (Geneva: UNCTAD, 2008).

19 Chapter 2. Investing in Mekelle

A. Introduction Mekelle is the sixth largest city in Ethiopia and the capital of the Regional State of Tigray. Since the country’s independence, Mekelle has been among the fastest growing regions of Ethiopia. The population has increased from 20,000 in the early 1970s to 215,546 by 2007.21 The city lies in the Ethiopian highlands 780 km north of Addis Ababa. The city has a temperate climate and low malaria prevalence due to its elevation (over 2,200 meters).22

The city of Mekelle was established in the 1870s, and selected as Ethiopia’s capital by Emperor Yohannes. Previously, it had been the site of several small settlements. The city’s strategic location in a large valley in the Ethiopian highlands placed it at the crossroads of the ancient salt trade in the Afar region to the east, and within easy access of the Red Sea, 200 km to the northeast.

It is important to note that Mekelle is the primary economic hub in the Tigray region. Within a 100 km radius of the city, there are rich and fertile farmlands to the south, significant mineral deposits to the east and west, and over one hundred rock-hewn churches throughout the region that serve as important tourist destinations. Mekelle is also home to a number of top universities, including Mekelle University and the Mekelle Institute of Technology.23 The Mekelle markets are reputed to be the largest vendors of livestock and salt in Ethiopia. The city’s international airport, completed in 2003, provides daily flights to Addis Ababa and other Ethiopian cities. Its international cargo service is due to expand in the near future, now that the airport has received its international certification in 2008.

The region is known for its superior quality of its leather, produced from local sheep and goats. It has played a robust role in livestock-related industries, on which investors are eager to capitalize. Additionally, numerous readily available source materials have enabled the rapid growth of the city’s industrial sector, which includes the largest cement plant in Ethiopia. Mekelle is now building what will become one of the country’s largest metal re-processors, a project due to be completed in 2009.

In recent years, Mekelle has experienced increased agricultural production due to improved farming techniques and a transition from subsistence to cash crop farming. This growth has improved agro-processing opportunities for fruits and vegetables. The region is also a notable producer of high quality honey, and high value/low volume items such as spices, natural gum, and color additives. In addition, Mekelle maintains a reserve area for floriculture that should help attract greater investment into the city.

The regional and municipal governments have undertaken several initiatives to attract additional foreign direct investment to Mekelle. Along with the Millennium Cities Initiative (MCI), the Tigray Investment Office (TIO) helps to facilitate the investment process for domestic and

21 Government of Ethiopia, Census 2007, op. cit. 22 Government of the City of Mekelle, Urban Scope of Study: Mekelle Finance Planning and Management (Mekelle: Mekelle City Plan Preparation Project Office, 2006). 23 Both institutions use “Mekelle” in the official spelling.

20 foreign investors. The city and region have also started business process reengineering (BPR) programs to improve efficiency, promote development, and create opportunities for public/private partnerships.

Mekelle is strategically located in the Tigray region, with access to the primary port of Djibouti and the ports of Eritrea (once relations improve). Its pleasant and temperate climate offers great agricultural and tourist potential. The city’s low operating and wage rates and wealth of skilled laborers and students should ensure that Mekelle competes favorably with Addis Ababa for prospective investors.

B. Mekelle economy Mekelle is home to over 800 grain mills, 500 food shops, an extensive public transport network and an active urban—rural exchange of goods. Mekelle has 30,000 micro and small enterprises. However, a significant number of them (65 percent) are in the informal sector, limiting the tax base. High levels of poverty (43 percent of the residents are below the absolute poverty line) and migration create further obstacles to providing effective public services in Mekelle. Long-term planning efforts, however, have helped Mekelle make progress in this respect. Between 1993 and 2002, the city received 65 percent of investment in the Tigray region.24

C. Reserved areas of investment25 Foreign investors are allowed to invest in all areas except those reserved for the Government or domestic investors. Additionally, some areas of investment are designated only for joint ventures between investors and the Government.

1. Reserved for the Government The following areas are exclusively reserved for the Government: • Postal service, with the exception of the courier service. • Transmission and supply of electric energy through the integrated national grid system.

2. Reserved for joint investment The following areas of investment are reserved for joint venture with the Government: • Manufacturing of weapons and ammunition. • Telecommunications services.

3. Reserved for domestic investors The following areas are reserved exclusively for domestic investors: • Banking, insurance, microcredit and savings services. • Travel and shipping agency services. • Broadcasting services. • Air transport with fewer than 20 seats. • Retail trade and brokerage.

24 Drawing on information obtained from the Tigray Investment Office, Tigray Investment Guide (Tigray, Ethiopia: Tigray Investment Office, 2008). 25 Ibid.

21 • Wholesale trade (excluding supply of petroleum and its by-products, as well as wholesale sale of locally produced products by foreign investors). • Import trade (excluding liquefied petroleum gas, bitumen and, upon with approval from the Council of Ministers, materials used as inputs for export products). • Export trade of raw coffee, chat, oilseeds, pulses, hides and skins bought from the market, and live sheep, goats and cattle not raised or fattened by the investor. • Construction companies, excluding those designated as grade 1 by the Ethiopian Investment Agency. • Tanning of hides and skins up to crust level. • Hotels (excluding star-designated hotels), motels, pensions, tea/coffee shops, bars, nightclubs and restaurants excluding international and specialized restaurants. • Travel agencies, and trade auxiliary and ticket selling services. • Car-hire and taxi-cab transport services. • Commercial road transport and inland water transport services. • Bakery products and pastries for the domestic market. • Grinding mills. • Barber shops, beauty salons, and tailoring services, except garment factories. • Building maintenance and repair, and maintenance of vehicles. • Saw milling and timber making. • Customs clearing services. • Museums, theaters and cinema hall operations. • Printing industries.

D. Investment permit26 If a foreign investor makes a decision to invest, he or she must submit a request to the Ethiopian Investment Agency and meet the capital requirement for foreign investors.

1. Required minimum capital The required minimum capital is US$ 100,000 for a single investment project or US$ 60,000 for a joint investment with domestic partners.

2. Required minimum capital (approved sectors) In the following approved sectors - engineering, architecture, accounting and audit services, project studies, business and management consultancy services, and publishing – the minimum capital required is: • US$ 50,000 if the investment is made wholly on his/her own. • US$ 25,000 if the investment is made jointly with domestic investors.

However, a foreign investor reinvesting profits or dividends or exporting at least 75 percent of his/her outputs shall not be required to allocate a minimum capital.

26 Ibid.

22 E. Federal level investment incentives27 To encourage private investment and promote the flow of foreign capital and technology, the following incentives are granted to investors (both domestic and foreign) engaged in new enterprises or expansions:

1. Exemption from customs duty Investors are granted full exemption from the payment of customs duties and other taxes levied on imports of all capital goods for the investment, such as plant machinery and equipment, as well as spare parts worth up to 15 percent of the value of the imported capital goods. Capital goods imported without the payment of import customs duties and other taxes levied on imports may be transferred to another investor enjoying similar privileges. Exemption from customs duties or other taxes levied on imports are granted for raw materials necessary for the production of export goods.

Ethiopian products and services destined for export are exempted from the payment of any export tax or other taxes levied on exports. Some investment areas, including hotels (other than those star designated), wholesale, retail and import trade, and maintenance services are not eligible for exemption from customs duty. Additionally, vehicles used for selected investment projects may be imported duty-free.

2. Duties Ethiopian products (except coffee) and services destined for export are exempted from the payment of any export tax or other taxes levied on exports.

3. Exemption from income and profit tax Duty-free import of capital goods, including vehicles, is exempt from paying income and profit taxes.

4. Tax holiday Any income derived from a new manufacturing, agro-industry, or agriculture investment shall be exempt from the payment of income tax for 2-7 years depending on the area of investment, the volume of export, and the location in which the investment is made.

F. Regional investment incentives

1. Industrial zones The Government of Tigray has established industrial zones with basic infrastructure (such as telephone, electric power, road and water) in nine major towns in the region: Mekelle, Adigrat, Adwa, Axum, Endaslasie, Alamata, Maichew, Wukro and Humera. This enables investors to rent land at a lower fixed lease price without auction. The lease price for Mekelle is US$ 0.07 (ETB 0.75) per m2.

27 Ibid.

23 2. Approved investments for free land lease Land can be leased for free in the following investment areas: • Plant nurseries. • Rubber and balsam production. • Incense and resin production. • Commercial forestry. • Livestock production, meat preservation, and meat products. • Dairy farming and processing. • Poultry farming and processing. • Technical and vocational training and engineering colleges. • Hospitals. • Construction of low-cost houses. • Manufacture of pesticides and other agro–chemicals and products (must include bulk preparation). • Manufacture of pharmaceuticals, medical chemicals, and botanical products. • Manufacture of glass and glass products. • Production, processing and preservation of fruits and vegetables. • Manufacturing of prepared animal feed. • Manufacturing of wines. • Tannery and dressing of leather. • Distilling, rectifying, blending of sprits; ethyl alcohol production from fermented materials. • Manufacture of clothing apparel, except fur. • Manufacture of leather products and articles. • Manufacture of leather footwear. • Manufacture of electric motors, generators and transformers. • Manufacture of electricity distribution and control apparatuses. • Manufacture of electronic valves, tubes, and other components.

3. Agricultural investments For agricultural or agro-processing investments (outside the industrial zone), the current land rent ranges from US$ 2.70 to US$ 3.60 (ETB 30-40) per hectare. Lease periods can be up to 50 years from the Government and up to 20 years from individual farmers.

4. Land as collateral An investor who has leased rural land may present his “use right” as collateral (Proclamation No. 97/1998, Article 9) and may bequeath his investment land to his successors (Regulation No. 40/1999, Article 26m).

5. Grace period for lease Based on the type of project and the amount of investment capital, a grace period of 1-7 years is provided to any person who has leased urban land.

24 6. Reduced lease price A lease price discount of up to 45 percent is available to real estate developers.

G. Guarantees to investors28 As evidenced by the Investment Proclamation of 2003, the Ethiopian Government has a strong commitment to unfettered capital repatriation and the remittance of dividends and interest by foreign investors. Although legal protection only extends to government-approved investments, it covers the following remittance types: • Profits and dividends accrued from an investment. • Principal and interest payments on external loans. • Payments related to technology transfer or management agreements. • Proceeds from the sale or liquidation of an enterprise. • Proceeds from the sale or transfer of shares or of partial ownership of an enterprise to a domestic investor. • Compensation paid to a foreign investor.

In addition, expatriates employed in an enterprise may remit in convertible foreign currency salaries or other payments accruing from their employment, in accordance with the foreign exchange regulations of the country.

1. Guarantee against expropriation Ethiopia’s Constitution protects private property and the country’s Investment Proclamation provides investment with guarantees against expropriation or nationalization that occurs in the public interest. When such expropriations occur, the Government guarantees adequate compensation corresponding to the prevailing market value of property, and such payment shall be effected promptly.

2. Loss carried forward Business enterprises that suffer losses during the tax holiday period can carry forward such losses for half of the income tax exemption period following the expiry of the exemption period.

28 Ibid.

25 Chapter 3. Opportunities for investors

A. Sectoral selection criteria and analysis The main opportunities for investment in Mekelle and the surrounding districts include livestock (and related industries), apiculture, agro-processing (including vegetables and oilseeds), high value/low volume agricultural niche products, tourism (in particular, hotels and other support services), and manufacturing and mining. It is important to note that the specific opportunities described below are meant to be illustrative and these are by no means the only opportunities for investment in Mekelle.

This section draws extensively on documentation provided by the Ethiopia office of the Netherlands Development Organization (SNV). It examines Business Organization and Access to Markets (BOAM) and refers to interviews conducted by the author (see sources consulted in Appendix 4). To facilitate review of the sectors, each identified area will be broken into four sections: overview, current status, opportunities, and constraints.29

B. Livestock The livestock population of Ethiopia is the largest in Africa and the 10th largest in the world. According to a 2008 survey, the country possesses 47.5 million cattle, 47.8 million sheep and goats, 8.7 million pack animals, and 39.6 million poultry. Reports indicate that these numbers are increasing, and the livestock sector currently accounts for about 30 percent of the agricultural GDP and about 16 percent of the total GDP of Ethiopia. This sector is primarily driven by the hide and skin industry, but livestock is also a major source of food, with an annual per capita production of 24 liters of milk, 10 kg of meat, and 40 eggs.30

Currently, Tigray is estimated to have nearly 4 million cattle, 2 million sheep, and 2 million goats, accounting for 11 percent of the country's total livestock population. Although livestock populations are large, farmers in the region use traditional animal husbandry methods and, as a result, there are significant opportunities to increase efficiency and facilitate sector growth. Numerous investment opportunities exist to introduce commercial practices in livestock breeding, meat and leather production, and milk, egg, and animal feed processing.31

Livestock and livestock products are Ethiopia’s fifth most valuable export and accounted for US$ 66 million in earnings during 2007.32 Annual production of livestock products includes 288,000 tons of meat, 938,000 tons of milk, and 16.7 million hides and skins.33 The sector

29 All investment-related data is sourced from the Tigray Investment Office, Tigray Investment Guide (Tigray, Ethiopia: Tigray Investment Office, 2008). 30 Government of the City of Mekelle. Urban-Urban and Urban-Rural Linkage Studies (Mekelle: Mekelle City Plan Preparation Project Office, 2006); Government of Ethiopia. Agricultural Sample Survey 2007/08(2000 E.C). (Addis Ababa: Central Statistical Agency, 2008). 31 Government of the Regional State of Tigray. Policy Framework for Regional Development and Economic Growth Corridor. (Addis Ababa: Tigray Ministry of Agriculture and Rural Development and UNDP, 2007). 32 Government of Ethiopia, Annual Report on Macroeconomic Developments, op. cit. 33 Johannes Agonafir, “Market and marketing of products within the selected value chains,” (Addis Ababa: BOAM—SNV, 2005).

26 nevertheless remains underdeveloped and the Ethiopian Government and African Development Bank have partnered to devise a 20-year livestock development plan to be introduced in 2009.

1. Milk products Overview Processed milk goods present a lucrative opportunity for a value-added product. A 2008 government-sponsored agricultural survey indicated that milk production was about 3.22 billion liters in 2008 with an average price of $ 0.50 per liter.34 Milk is widely consumed in Ethiopia, but is commercially unavailable in most stores outside Addis Ababa. Dried milk powder and fresh milk purchased locally from households with surplus production fills some of the supply gap. Demand, however, remains high due to the prominence of milk and dairy products in the local cuisine. Unfortunately, dairy production remains underdeveloped despite large livestock populations.

Current status Butter and cheese are consumed more commonly in Ethiopia than in other East African countries. Traditional butter is used for cooking and as a condiment, and traditional cheese is used during most meals. The high price and limited availability of milk are the major factors restricting greater usage in Ethiopia.

Opportunities Potential intervention points include: • Improve dairy products through cross-breeding cows and providing complementary feed to ensure higher quality products. • Support raw milk producers (including small farmers) with training and organizational skills. • Introduce milk collection centers with appropriate storage facilities to increase milk supply and reduce price fluctuation. • Improve the packaging technology and quality of the finished product. • Market/brand yogurt and cheese products based on local tastes.

Technical constraints The major technical constraints in this sector include poor animal health, improper feed and nutrition, and poor breeding stock. However, the Government has aggressively targeted these issues in recent years. In addition, the Government has created an extensive network of animal clinics with heavily subsidized services to help address these problems. Research into feed and nutrition technology has been prioritized as has the increased use of productive breeds. Although problems still exist, recent improvements are noticeable. • Animal health: Animal health inhibits dairy development in Ethiopia because poorly fed animals develop low disease resistance and fertility problems. The lack of veterinary services makes these problems difficult to address. • Feed and nutrition: In highland zones, high population growth and density are causing a shortage of grazing areas for livestock. In the lowland areas, the shortage of feed and

34 Government of Ethiopia, Agricultural Sample Survey, op. cit.

27 water during the dry season forces animals to trek long distances in search of food. The quality of feed also deteriorates during the dry season due to inadequate storage options. • Breed types: Ethiopia's livestock has evolved in a challenging environment, and much of the stock has become better conditioned to withstand feed and water shortages, disease, and harsh climates. However, these factors also limit dairy production.

Market constraints • Limited temperature-controlled supply chain (cold chain). • Limited packaging choices (imported packaging is very expensive). • Limited consumer buying power. • Inadequate distribution systems. • Religious holidays (such as Orthodox Christian fasting days) during which milk consumption is prohibited (although the effect is uncertain due to partial observance of fasting periods).35

Box 2. Diary investments

Millennium Villages Dairy The Millennium Villages Project (MVP) is exploring dairy collection as an area for increased commercialization, in order to build stronger linkages with urban markets. Currently, the Koraro village cluster in Tigray State has a dairy production center that utilizes cows from 50 farmers. This center will soon begin production of cheese and cream products as well. As production expanded in 2008, the MVP formulated its regional production and distribution system to maximize its market share. In addition, the Food and Agriculture Organization (FAO) maintains a number of milk collection centers near Mekelle and there are plans to establish several large- scale production centers in the city itself. The Relief Society of Tigray (REST), a leading regional NGO, has made efforts to establish a share company to manage rural production and ensure fair trade practices.

Investment story: Land O’Lakes Dairy Land O’Lakes is operating a non-profit campaign against hunger partially funded by the United States Agency for International Development (USAID). The NGO has a presence in 32 countries, including 11 in Africa. The NGO organizes the region into “milk sheds” in order to evaluate its dairy potential, including three in Ethiopia in Mekelle-Adigrat, Lake Tana (near Bahir Dar) and Addis Ababa. In the Mekelle milk shed, Land O’Lakes has helped establish 20 cooperatives. The cooperatives jointly own 60 percent of the 4,500 crossbred dairy cows in the Mekelle milk shed. Land O’Lakes also operates a processing center with a capacity of 5,000 liters per day and is actively securing long-term contracts with restaurants and cafés. The center began operations in August 2008 and employs a staff of 15.

Sources: Interview with Millennium Villages Project Business Development Coordinator, (May 28, 2008). Interview with Land O’Lakes Chief Operating Officer, (June 1, 2008).

35 Business Organization and Access to their Markets (BOAM), Milk and Milk Products Value Chain Coordination Group Meeting (Addis Ababa: BOAM—SNV, 2006).

28 2. Meat products There is only one slaughterhouse in Mekelle, the Abergelle Slaughterhouse. However, it processes fewer than a dozen cattle per day. The Abergelle Slaughterhouse is funded by the Dejenna Endowment, a non-governmental body founded in 2004 to develop agricultural and natural resources in Tigray. It began operations in late 2008.

Overview Livestock herding currently supports or sustains the livelihood of an estimated 80 percent of Ethiopia’s rural poor. Apart from its importance as a source of food and income, it is the only source of traction power in traditional peasant farms. Highland areas (where there is less cultivatable land) account for over 75 percent of the livestock population.36 However, increasing livestock density has resulted in overgrazing on both arable and grazing land, which is also having a negative impact on land and vegetative cover, although the Government is making efforts to remedy this.

Current status Livestock has many functions. It can be a source of (1) food, (2) employment and investment opportunities, (3) inputs for crop production and soil fertility management, and (4) fuel, through the use of dried dung. With these multiple functions, livestock can serve as a means for improving food security and ensuring better livelihoods for peri-urban and rural populations. Although livestock is vital to the economy and to the livelihood of smallholders, the livestock production system is hampered due to its lack of market orientation. Generally, livestock (meat or dairy) is not kept for marketing purposes. The primary reason for selling an animal is to generate income to meet unforeseen expenses. Meat exporters have found it difficult to set up long-term contracts with suppliers and usually must purchase livestock at animal markets. They have also established a vertically integrated supply chain. There are recent indications that as the markets have grown, supply problems have decreased. Most urban consumers either purchase live animals for home-slaughter or meat from butchers.

Opportunities Despite the contributions of livestock to the Ethiopian economy, the Government has allocated very little money to develop this sector. In 2007, the Government allocated only 5 percent of its recurrent expenditure to agriculture, and less than 0.3 percent to livestock.37 With scant previous investment in the livestock sector, future investors can capitalize on its potential. In addition to meat processing for both domestic and export markets, there is significant opportunity for improved animal health and disease control services.

Constraints The livestock sector faces many of the same problems found in the meat and dairy sectors, namely inadequate feed and nutrition, widespread disease and poor health, and poor breeding stock, as well as inadequate livestock policies with respect to credit, extension support, marketing, and infrastructure. The government of the Regional State of Tigray has begun to address these deficiencies by assigning animal science experts to communities as part of general

36 Wilhem Elfring, Yohannes Agonafir, and Mulugeta Tefera, “Value chains identification for intervention study on value chains,” (Addis Ababa: BOAM – SNV, 2005). 37 Agonafir, op. cit.

29 extension efforts. Abattoirs typically have very serious problems with disposal and utilization of byproducts. Offal removal is cited as a major obstacle by many companies, many of whom ultimately dispose of carcasses through unsanitary burning. The introduction of technology to either process offal into animal protein for feed or use in environmentally friendly cleaning/disposal mechanisms will require significant attention if the industry is to expand. However, the recent incorporation of waste treatment facilities into the tannery process bodes well for similar advances in the meat processing industry.

Box 3. Meat production investments

Abergelle Slaughterhouse The Abergelle Slaughterhouse, one of the largest Dejenna Endowment-supported projects, produces exclusively for the export market. More than 95 percent of production is designated for export to the Middle East, primarily the United Arab Emirates (UAE), Saudi Arabia, and Bahrain.

The factory began operation in late 2008 as the first modern slaughterhouse of its kind in the region (and the only slaughterhouse in all of Ethiopia to export meat). It uses many advanced slaughterhouse techniques, including large cold rooms, vacuum packing, solid and liquid waste treatment, and a rendering plant for bone, meat, and blood processing. The 5.4 hectare slaughterhouse site is part of a system of three fattening stations. All components of the process are monitored and certified according to international standards and through routine inspections by independent federal inspectors. Land transport is used to ship more than 80 percent of production with the remainder exported as air cargo through the Mekelle International Airport.

The slaughterhouse has a total of 180 employees (fattening centers included) and initial capital of US$ 7.2 million (ETB 80 million). Employees work eight hours a day, six days per week. The slaughterhouse is designed to process 30 cattle and 120 goats per hour. Officials expect that initial bottlenecks will be remedied as animal supply networks are improved, and production was expected to increase in 2009. As part of an integrated livestock product chain, leather from meat production at Abergelle is sold to Sheba Leather (see box 4).

Source: Interview with Abergelle Slaughterhouse General Manager, (June 4, 2008).

3. Leather goods Overview Ethiopian highland skins and hides provide a strong base for semi-processed and finished leather products. In 2007, the leather sector was one of the top five export earners, representing 6.5 percent of total earnings (livestock-related products comprised 12 percent of export earnings). Estimates place the off-take rate for hide and skin production at approximately 2.5 million cattle hides, 9.2 million sheepskins, and 6 million goatskins per annum (although actual production is less). There are now 20 tanneries in operation, four of which are state-controlled (the rest are under private ownership). Ethiopian tanneries have traditionally exported leather at various stages of processing (from pickled to crust) to international markets. The main markets include

30 China, India, Italy, Japan, the Netherlands, the United Kingdom, and the United States. Ethiopia is best known for its sheepskins, which constitute 70 percent of the hides and skins exported and 80 percent of all pickled hides. Since Ethiopia prohibits the export of raw hides and skins, the predominant export products are pickled and wet blue hides and skins. Approximately 60 percent of goatskins, for example, are sold as wet blue hides. Most of the exports go to Europe and Asia (very few go to COMESA member states). Ethiopian sheepskin and goatskin leather make up 2.2 percent and 1.3 percent of world exports, respectively.38

Current status The significant increase in the number of tanneries in the past several years has raised demand for raw leather and increased prices without effectively addressing supply constraints. The 20 tanneries in Ethiopia have a combined capacity of approximately 25 million skins and three million hides, yet are presently operating at only 65 percent capacity for skins and 80 percent for hides. Four new firms are under development even though there are not enough high quality hides and skins to function at capacity. Company structure varies widely across the industry. For example, Mojo, a new tannery, has French technical assistance while Ethiopia Tanneries has a Czech partner.

Awash, Ethiopian Pickling and Tanning, Ethio-Leather Industries (ELICO), and ELICO Universal are all shareholding companies controlled by Mohammed Al-Amoudi, the prominent Ethiopian-born Saudi billionaire. ELICO is currently developing a new tannery for hide finishing.39

Opportunities Ethiopia has the best-developed leather industry in sub-Saharan Africa, with the possible exception of South Africa. Ethiopian highland sheepskin is internationally recognized for its quality, and is in significant demand. The industry has considerable scale, experience, and capacity, as well as extensive forward integration. There are a number of trends in Ethiopia that support the development of this industry, including the privatization of large public sector firms. In addition, the United Nations Industrial Development Organization (UNIDO) provides support for effluent treatment plant design and installation. Although historically there have been few domestic market opportunities for finished products due to low consumer buying power and the relatively high cost of production, production costs are decreasing and there are indications this sector is now competitive with Asian imports. As Ethiopian firms gain an increasing share of the domestic market, export-oriented investment is a logical next step. For instance, Kenyan leather companies and consumers offer substantial import opportunities.

Building on underutilized infrastructure (the tanning industry is currently operating at only 30 percent capacity) will also be crucial. The production of leather uppers also has considerable potential, assuming a consistent supply of quality leather.

Taking into account the population of cattle, sheep, and goats, the estimated off-take rates, and the informal export trade of live animals, national leather and leather-goods production on an annual basis should amount to 2.5 million hides, 9.2 million sheepskins and 6 million goatskins.

38 Agonafir, op. cit. 39 Ibid.

31 However, total production at Ethiopian tanneries has only reached 1 million hides, 7.5 million sheepskins, and 4.5 million goatskins per annum. Thus, the collection rate is about 40 percent for hides, and about 80 percent for skins. The high level of backyard slaughter by consumers and small butchers, and the relatively low price per hide and skin explain a large part of the gap between potential and actual collection.40

Constraints The most serious problem with the leather sector is the poor quality of hides and skins, largely attributed to the traditional system of animal husbandry at the household level. While knife damage is the major problem impacting hide and skin quality, other issues, include disease, water shortages, poor livestock management and parasites also cause quality degradation. Unfortunately, once raw leather is damaged, little can be done to improve its quality.

Locally, shoes are the primary leather good in demand. Ethiopia prohibits the import of secondhand shoes, which results in a captive market for mid-range quality shoes produced by the local shoe industry. However, there is great demand for imported Chinese shoes despite their 40 percent import duty. However, locally produced shoes have a reputation for durability and are gaining a greater market share as prices decrease and more styles become available.

In general, Ethiopia has greater tanning and processing capacity than the existing market structure can support. Country-wide, tanneries are operating at only 30 percent capacity although recently introduced environmental standards should lead to closing less viable factories.41

40 Elfring, et al., op cit. 41 Agonafir, op. cit.

Box 4. Leather industry

Sheba Leather The company was established in 1993 as a public limited company (PLC) with initial capital of US$ 800,000 (ETB 9.4 million), but the company did not begin operation until 2003 (due in part to the Ethiopian-Eritrean War). Sheba Leather will soon begin an expansion phase as it ultimately grows to a total investment of US$ 23 million (ETB 261 million). The tannery currently does not produce finished products, but with the completion of its expansion in 2009, it will begin producing 1.8 million pairs of shoes and 1.8 million gloves per year. While a portion of shoe production will be sold for the domestic market, the gloves will be almost exclusively export items. By the time the factory reaches full capacity, it will have 1,750 employees including technicians, supervisors, chemists, and designers. The company’s financial sources indicate a close relationship with the Government; 60 percent of the company’s funds come from the Endowment Fund for Rehabilitation of Tigray (EFFORT), one of two large government- initiated investment entities committed to achieving sustainable development through exporting goods and services. The other 40 percent come from private investors.

In its first several years of operation, Sheba Leather encountered difficulties due to the lack of technical capacity among its workforce and less than optimal quality of leather, of which 60-70 percent were poor due to parasites (mange mite), scratches, and knife cuts. The company is working to overcome quality issues through extensive test sampling from different suppliers. Currently, Sheba Leather only exports semi-finished leather to Europe and Asia. These exports are subject to a 5–25 percent tax on semi-finished skins in a governmental effort to encourage value-added production. Sheba Leather is operating at 75 percent of capacity, producing an average of 4,500 skins per day (with 6,000 skins per day at maximum capacity).

Sheba Leather has also emphasized environmental management. Although it currently operates only primary environmental treatment, the company will soon begin secondary treatment as well. In fact, of the initial US$ 20 million capital investment, 30–40 percent were reserved for waste management.

It should be noted that although no environmental impact assessment was performed before the factory was built, Sheba Leather is committed to achieving the highest international environmental management standards. Accordingly, the company has achieved certification through the International Organization for Standardization quality management system (ISO 9001/2000).

Sources: Sheba Tannery, http://www.telecom.net.et/~shebatan, and International Organization for Standardization, http://iso.org/iso/iso_catalogue/management_standards/iso_9000_iso_14000/iso_9000_essentials.htm.

33 4. Animal feeds Overview Modern livestock and poultry production requires concentrated feedstuffs in order to increase the value chain and ensure high dairy and meat output. Several medium and large concentrated feed producers are currently beginning production in Tigray in 2009.

Current status At present there is very little concentrated feed supply in the country. Since meat is sold primarily to Middle Eastern markets, it must adhere to Islamic dietary law, thus preventing the use of animal-based animal feeds.

Opportunities Since the major ingredients in concentrated feed come from locally available materials, this represents a prime investment opportunity. However, it must be noted that the lack of concentrated feed in Ethiopia is the primary factor limiting the viability of large-scale dairy and poultry production.

Constraints Constraints facing production in the Mekelle area include a lack of preferred crop types grown locally. Waste products from oilseeds are the preferred ingredients for feed concentrates and these crops are primarily grown in western Tigray. Limited exposure feed concentrate production technology also presents a minor barrier.

Box 5. Animal feed processing

Abergelle large-scale concentrated feed factory The Abergelle feed factory was expected to be completed in 2008. It will produce finished concentrated feed, composed of oil cakes, molasses, urea, salt, vitamins and minerals. The feed will be available in pellet form and powder. This factory will function as a sister company to Abergelle Slaughterhouse, but it will also sell to the general market and likely have a strong impact on the livestock industry in Tigray and throughout Ethiopia.

Locally owned and operated animal feed processing Currently, several community associations in Tigray are using traditional feeding practices that collect dried chaff waste after the harvest. The eventual goal for several of these associations to develop processed feed using animal and plant waste materials. However, even a modestly-sized plant can cost up to US$ 500,000 and obtaining financing for such a project could be very challenging because of collateral requirements. It’s important to note, however, that business models that incorporate cooperatives or community associations are given preference for land and technical assistance by the Government.

Source: Interview with Abergelle Slaughterhouse General Manager, (June 4, 2008).

34 C. Poultry Overview Poultry production in Ethiopia is not well organized and the sector is primarily controlled by informal smallholders. Local breeds offer poor egg production and small, low quality broilers. The local hen production capacity is 80 to 100 eggs per hen per year versus a commercial hen capacity of 250. Local breeds mature slowly and can require up to a year to reach market size, while commercial broiler breeds mature in 45 to 60 days.42

Current status There has been much interest recently in poultry production. At the national level, the sector is rapidly changing as export-oriented and domestically-focused production units come online.

Opportunities Improved broiler production requires the establishment of hatchery units that provide day-old chicks. In addition, egg production and quick broiler maturation requires concentrated feed. As a whole, the country offers significant potential for the development of a poultry business to cater to domestic consumption and export.

Constraints Companies are likely exposed to disease and supply shortages, as well as the unavailability of feed, medication and feed ingredients. Current broiler production is limited by the import of day- old chicks for this use. This bottleneck can be remedied through the establishment of local broiler supplies in connection with foreign partners. This would ensure a sustainable supply of day-old chicks and alter the production dynamics of the business. An Addis Ababa-based firm has recently established a small hatchery unit to begin addressing this gap.

D. Fishery Overview Tigray is an arid region with several high profile hydroelectric projects slated to come online in the near future. These sites can be used potentially as inland fisheries. Foreign investment is required to install fishing equipment, as well as cold storage and transport facilities. The reservoir at the Tekeze hydroelectric plant offers a new and undeveloped opportunity for aquaculture near Mekelle (the plant is located only 120km from the city).

Current Status Ethiopian fishery is almost entirely artisanal, consisting largely of small, one-man rafts with limited carrying capacity. Approximately 15,000 fishermen are employed in this sector. Aquaculture in Ethiopia is still in its infancy, with an average production of about 50,000 tons per year and revenue amounting to US$ 3 million.43 Fish consumption in fishing communities is estimated to be as high as 10 kg per capita per year. In major urban areas, fish demand has been stimulated by the regular supply of quality fish at affordable prices, in comparison with the high price of meat. In 2004, the national demand was estimated at 85,000 tons, which is much greater

42 Elfring, op. cit. 43 Ibid.

35 than the estimated current total annual fish yield potential of the country (51,000 tons). Moreover, demand is expected to increase above 100,000 tons by 2010.44

Opportunities A new opportunity for aquaculture in Tigray will be available once the Tekeze hydroelectric plant is completed. In addition, the public enterprise that now controls the marketing of fresh fish (i.e. Fish Production and Marketing Enterprise) is expected to be privatized as soon as a buyer can be found. Notably, the company maintains a well-functioning cold chain and maintains several outlets in Addis. Improved fishery farming and harvesting techniques combined with processing, storage, and preservation can help improve profits in this nascent industry.

Constraints Fish production has been largely depleted in lakes due to poor management, and as a result, periodic fish restocking would be necessary to replenish the commercial fish population.

E. Apiculture Overview Ethiopia ranks as the top honey-producing country in Africa and 10th overall in the world. It produces nearly a quarter of all African honey and just over two percent of total world output. It is also the 4th largest global beeswax producer after China, Mexico and Turkey. There are about 10 million bee colonies and at least 800 honey-source plants in the country with an annual honey and beeswax production of 24,700 and 3,200 tons, respectively. More than 90 percent of the honey produced is consumed domestically. This sector has been hampered by the low productivity of traditional methods, which produce 5–6 kg of honey per hive per year, while those using new hive technology can produce up to 60 kg per hive per year (although realistically they produce closer to 30 kg on average per year).45 Collection of honey and beeswax begins after the rainy season in October and is completed by December. The major honey and beeswax producing regions in Ethiopia are Oromia, the Southern Nations, Nationalities, and Peoples Region (SNNPR) and Tigray.46

Beeswax is a valuable hive product obtained from honeybees. It is a by-product of honey production collected mainly from traditional hives rather than modern hives, which the Ministry of Agriculture and several NGOs are now promoting. The wax yield from traditional hives is 8– 10 percent of the honey yield, compared to 0.5–2 percent from modern hives. The bulk of beeswax supply is obtained from residue during the production of “Tej,” a mild alcoholic beverage popular throughout Ethiopia.47

44 Food and Agricultural Organization (FAO), Agricultural Production and Diversification Program Food and Cash Crops (Rome: FAO, 2005). 45 Interview with industry participant, (July 2009). 46 United Nations Conference on Trade and Development (UNCTAD), Ethiopian Investment Guide (Geneva: UNCTAD, 2004), http://www.unctad.org/en/docs/iteiia20042_en.pdf. 47 Agonafir, op. cit.

36 Current status Beekeeping in Ethiopia is a traditionally important off-farm activity for many rural people. Both forest and backyard beekeeping are common cultural practices for many farmers. It is practiced in gardens and homes throughout the country. It is a small-scale, rural agricultural industry that provides a source of cash income for many peasant farmers. Several NGOs (e.g., REST) are actively involved in promoting and improving bee-keeping practices. There are 16 companies registered to export beeswax, but only four are currently active. Exporting can be difficult due to a lack of supply. All of the local districts (woredas) of Tigray produce honey of various colors— from white to red/dark—thus offering a wide market range to producers. Using traditional hives and methods, productivity in Tigray is estimated at 125 percent of the national average. The Wukro district (45 km from Mekelle and adjacent to the Hawzen district and the Millennium Village) is the largest producer in the Tigray region, followed by the Ahferom, Tselemti, Ganta- Afeshum, and Kolla-Tambien districts, in order of decreasing production.

The European Community is the world’s largest importer of honey and Germany is the largest single consumer, followed by Switzerland and France. The US and UK are also significant importers, as are Japan, Nigeria, Algeria, and Libya. The traditional clients of Ethiopia are primarily in the Middle East - Saudi Arabia, Yemen, Israel, and the UAE - as well as Djibouti in Africa. Ethiopian honey is considered to be of good quality, even though in the world market it is often regarded as dark in color and strong in flavor. This makes the honey more suitable for specialized markets that pay premium prices. Prices for both raw and extracted honey are constant year-round in local and international markets. In Tigray, honey posts slightly higher average prices than in other parts of Ethiopia, but this is largely attributed to the superior quality of honey from this region.48

Opportunity At this point, with a growing honey and beeswax industry, the objective is not to increase production but to identify value-added activities. Some potential products include organic honey or specialized cosmetics that require strict quality control of beeswax.

As global market preferences increasingly shift towards organic products, Ethiopian producers are well positioned to capitalize as premium organic honey suppliers. Ethiopian honey is derived almost entirely from wild bees, and no chemicals are used in any part of its production. There is reason to believe that if Ethiopian honey is certified to meet international organic standards and there is increased access to European markets, Ethiopia could develop a significant honey export market. In order to achieve this, several preconditions must be met: • Introduction and dissemination of suitable and modern hives. • Introduction of suitable storage and packaging methods. • Introduction of modern methods of extraction and processing. • Organization of marketing channels. • Establishment of appropriate collection systems. • Creation of extension networks and periodic training for producers.49

48 Tigray Agriculture and Marketing Promotion Agency (TAMPA), Honey Situation Analysis (Mekelle: TAMPA, 2008). 49 Ibid.

37 The production of organic honey can help stimulate local economies at the village level. Landless households in particular can benefit from this activity because apiculture does not require owning land. In addition to government support provided by the extension system, the Millennium Villages Project is in the process of instituting a large-scale honey and wax production system across its 11 Ethiopian villages, as well as developing collection and management systems for 4,000 hives capable of producing 240 tons of honey annually for revenue of over US$ 1.2 million.50

Constraints The major constraints impacting apiculture in Ethiopia are a shortage of trained specialists and a lack of beekeeping equipment. Most outgrowers produce only one sixth of the honey that modern hives are capable of producing, largely due to their labor-intensive production methods and traditional apiculture techniques. These practices result in a higher priced honey that at times has difficulty competing on the international market.

50 Millennium Villages Project (MVP). Business Plan for Honey and Honey By-Products (Hawzen, Ethiopia: Millennium Villages Project, 2008).

Box 6: Honey investment

Dimma Honey The honey producer, Dimma Honey, directly oversees bee farms at 11 sites and 1,000 colonies across Tigray. At these sites, landless farmers are provided with modern hives and colonies on a credit basis redeemable through future honey production.

In addition to the 11 sites, there are 300 outgrowers maintaining 700 additional hives. Dimma is also coordinating with the Millennium Villages Project and might incorporate the villages into its production system. Dimma provides training and expertise to ensure that all honey products meet quality standards. Dimma relies on the relationships it has built with farmers, using an extensive system of information registration to determine a traceable supply that meets organic standards. However, Dimma has struggled to compete against lower quality, cheaper goods and is looking to introduce modern apiculture techniques.

Dimma’s honey processing plant began production in 2007 and is able to produce an average of one ton daily, which is the largest output in Ethiopia. At present, Dimma is running at 50 percent capacity with one shift able to produce just 600kg per day. Production started in July 2007 with initial start-up capital of US$ 1.76 million (ETB 19.5 million). The company has 34 employees, including seven that hold bachelor’s degrees. While Dimma is not presently exporting, it is actively recruiting markets in the Middle East and Europe.

Competition is limited in Dimma’s niche field because no other honey producer in Ethiopia is producing organic honey for export. However, honey capacity in the region is growing significantly in part due to the traditional harvesting techniques as well as assistance provided by REST and other development groups. Dimma’s high food standards are another advantage. The company is currently accredited through EU food safety regulations and will seek certification by ISO 9001 (at the cost of US$ 9,000 (ETB 100,000)) to provide quality assurance and conformity to international standards.

Source: International Organization for Standardization, http://www.iso.org/iso/iso_catalogue/management_standards/iso_9000_iso_14000/more_resources_9000/9001supch ain.htm

F. Vegetable and fruit processing Overview The economy of the Tigray region, much like the economy of the nation, is based largely on agriculture. The region is suitable for crops such as sorghum, sesame, cotton, barley, wheat, and teff. The region has an area of 53,638 km2 including 3,220 km2 (322,000 ha) of which is irrigable. Land with potential for irrigation in the region can be found in the Tekeze river basin (220,000 ha), Afar (65,000 ha), and Mereb river basin (37,000 ha). Currently, only 4,000 ha, or 1.2 percent of the total potential area, are being irrigated. The total water runoff in these three

39 basins is estimated to be 8.2 billion cubic meters. However, the amount of water currently used for irrigation purposes is less than 65 million cubic meters, or 0.8 percent of this total.51

Current status Most of the fruits and vegetables grown in the region are grown for local consumption, but there is also significant export regionally to Djibouti. Processed agricultural goods are also exported to Yemen, Saudi Arabia and other Middle Eastern countries. Domestically, the two most important food products are oranges (for canned and bottled orange juice) and tomatoes (as ketchup, tomato paste and tomato concentrate).

Opportunities The highest value export market is the European market through the Government-owned fruit and vegetable company, Etfruit. Etfruit collects fruits and vegetables from several state plantations and large private farms, transports them to the airport in refrigerated trucks, and ships them by air to Germany, Italy, and the Netherlands. Nationally, the major unprocessed exports are green beans, tomatoes, mangoes, and papayas. Private companies (only comprising 10 percent of the market share in 2005) have begun to follow suit. Ethiopian Airlines has recently purchased and leased new planes to increase the airline’s capacity to provide more cargo services. Opportunities also exist for improved cold chain and storage technologies to mitigate the effects of the narrow harvest window.

Constraints

Narrow harvesting window: Smallholders cultivate several crops simultaneously, thereby flooding the local market during the very short harvesting period. Due to their financial needs and the lack of storage options, farmers are forced to sell at very cheap prices. The potential for increased storage opportunities is evidenced by the profits obtained by the few middlemen with storage capacity.

Labor relations: Providing necessary support to farmers, including through various inputs and training. There is also a narrow growing season and the outgrowers face great uncertainty when selling their products.

Appropriate technology: Vegetable and fruit processing requires centralized facilities with appropriate processing technology, which is currently lacking. The major constraint in this area is inadequate and irregular supply of imported packaging materials.

Information: There is little market information for producers or other actors in the domestic value chain. In addition, there is no seed improvement or extension service support for export crops, only for food security crops, although the Government is intensifying its efforts to improve the situation.

51 Government of the City of Mekelle, Urban-Urban and Urban-Rural Linkage Studies, op. cit.

Box 7. Agro-processing investment

Aider tomato processing Construction of the Aider tomato processing plant started in 2005, although delays in construction and increased labor costs have resulted in a budget exceeding initial projections. The company began tomato processing in late 2008 with 4,000 m2 of production space in the Mekelle industrial zone. Aider Tomato processes 5 tons of fresh tomatoes into tomato paste and dried tomatoes daily. It has US$ 1.7 million in capital and 45 employees.

The chief logistical challenge for the company is the seasonality of tomatoes, and this creates a glut of production at certain times of the year, particularly during the August to September peak. However, the price reduction since 2007 of the product from US$ 0.50-0.60 to US$ 0.09-0.30 (ETB 6-7 to ETB 1-3) per kilo suggests that there is a widely and readily available supply. This also provides Ethiopia with a significant competitive advantage as most of the processed product is exported by barrel to Dubai and other Middle Easter countries.

Source: Interview with Aider Tomato General Manager, (May 30, 2008).

G. Agriculture Agriculture on average accounts for about 40 percent of GDP, 85 percent of exports, and 85 percent of total employment in Ethiopia. The vast majority of agricultural output is achieved through smallholdings. Despite improvements, some constraints in the agriculture sector remain, including the lack of agro-processing opportunities; insufficient transportation; the absence or near absence of storage facilities; and the use of traditional, low-production methods of cultivation. These deficiencies limit the potential for production, and depress potential markets. Efforts to improve awareness of price, supply, demand and quality have been addressed by the Tigray Agricultural Marketing and Promotion Association (TAMPA).

1. Oilseeds Overview Edible oils have become Ethiopia’s second largest export crop after coffee. Some oilseeds, including peanuts and sesame, are also important export crops. Tigray offers favorable agro- ecological conditions to introduce coconut and palm oil production. Unfortunately, the majority of these crops are grown in the western part of Tigray and more than 90% of the entire harvest (approximately US$ 5.3 million or ETB 60 million) are exported through Sudan to Port Sudan. There is marginal potential for routing oilseeds through Mekelle if the border with Eritrea is opened or if road conditions to the port of Djibouti improve.

Current status Domestic sales of edible oils are equal to 60-75,000 metric tons (MT), or 1.0–1.3 liter/capita, with a value of US$ 60 million/year. Oils are primarily consumed domestically whereas sesame and niger seeds are primarily exported to Asia and Europe, respectively. In general, Ethiopia currently exports to or imports very little oil seed from other COMESA member states.

Ethiopia-sourced raw materials account for approximately 35 percent of the total oil supply. 22,000–25,000 MT of domestic oil is produced from approximately 100,000 MT of domestically crushed oilseeds per year. Oilseed production consists of sesame, niger, linseed, and rapeseed. The remainder of the domestically consumed oil is comprised of approximately 50,000 MT of crude vegetable oil that is imported annually (mainly soybean oil from the US).52

Ethiopia’s installed crushing and refining capacity is 130,000 MT/year. About 60 percent of the processing plants are owned by the Government. Jointly, the plants operate at approximately 77 percent capacity. The big three crushers -- Addis-Modjo, Barda, and Amaresa -- are owned by the Government. Each has 100 MT/day crushing capacity providing the Government with 300 MT/day of 500 MT/day total crushing capacity. Addis-Modjo is the largest processing plant with a refining capacity of 15,000 MT/year, crushing capacity of 30,000 MT/year and solvent extraction capacity of 45,000 MT/year. However, it operates at only 30 percent capacity. Much of the imported oil supply is in the form of packaged refined oils. The lack of bulk handling facilities at the port in Djibouti makes importation of bulk oil very expensive.53

Opportunities There is a strong international market both for whole and processed niger seed. Niger seed oil is popular among high-end customers, such as restaurants and export-oriented manufacturers, while whole seed is popular in Europe and the United States as birdseed. Large areas of arable land are theoretically available from the state for the production of additional seed. Alternatively, additional production of oilseeds could take place on existing farms. International prices for niger and sesame seeds are high, and oilseed production is increasing in response. Japan and Korea pay premiums for whole sesame seed, although sesame oil can also command premium prices in the vegetable oil market. Pulses complement oilseeds well (they can be rotated with oilseeds) and are also in demand on the international market. Rotation thus becomes a viable, environmentally sound system for maintaining soil quality while reducing the need for expensive chemical inputs. According to TAMPA, even minor value additions such as bailing can increase the price of exported oilseeds by 30 percent.

Constraints Working capital: Most crushers reported that they lack the working capital necessary to buy seasonal products and store them for year-round crushing and sales. Infrastructure (especially electricity and water) near available land is also described as poor (although the Government is working to address these issues). As a result, oilseeds can only be stored for short periods of time, and the domestic transport of oilseeds is very expensive due to the inadequate road/rail system.

Regional markets: Niger seed is the most prevalent seed grown in Ethiopia, but most COMESA markets do not have a high demand for niger or its oil. There is especially little demand among the low-buying-power consumers who comprise the vast bulk of the market. Except for niger seed, most COMESA members produce the same oilseeds and oils as Ethiopia. High transport

52 Tigray Agriculture and Marketing Promotion Agency (TAMPA), Annual Report (Mekelle: TAMPA, 2007). 53 Johannes Agonafir, “Strategic intervention plan on selected four value chains and two reserve chains,” (Addis Ababa: BOAM–SNV, 2005).

42 costs, poor infrastructure, and the high cost of land mean that, in the regional market, Ethiopia has limited comparative advantage in most seeds. Consequently, most investment is likely to be directed toward domestic consumption or the export of specialty seeds such as niger and sesame. On the other hand, Ethiopia is currently a net importer of oils, and could be an attractive location for an investor interested in supplying regional oilseeds.

Domestic market: Domestic oilseed prices for sesame and niger seed are high because they compete in the international market, which sets higher prices. Imported oils are cheaper than locally processed high-end oils, thus profit margins for local production of sesame and niger oils are low. At present, the local market tends to support the export of specialty seeds and the import of locally-demanded oils.

Subsidized competition: USAID-supported vegetable oil distorts the market because its production and distribution is subsidized. This subsidized oil has an advantage over all other imports and even local production and sells below the market price for comparable oils from other sources. Recipients are reported to prefer to sell the oil for cash rather than for consumption. 54

54 TAMPA, Annual Report, op. cit.

Box 8. Edible oil investment

Yegaw PLC In Ethiopia it is common for companies to grow out of other businesses because established entrepreneurs have sufficient capital to fund new enterprises. Yegaw PLC started as a coffee wholesaler and later developed into a milling company, rental agency for cars and houses, and nail manufacturer. The company is now branching into edible oils.

Yegaw PLC occupies a 2,000 m2 factory and administrative center, with start-up costs exceeding US$ 600,000 (ETB 7 million). It currently has working capital of US$ 180,000 (ETB 2 million). Yegaw recently constructed a production factory for edible oil processing. However, to achieve economies of scale, it will need to significantly increase the capacity of the factory. Accordingly, the entrepreneurs involved have secured bank loans and imported production machinery capable of processing 20 times the current capacity, or 22,000 liters per 16 hour work day. The processed oil will be packaged in plastic bottles and barrels for distribution in Mekelle and surrounding towns. The viability of this enterprise will help to determine whether there is a benefit to the transport of raw ingredients from the western half of the Tigray region to Mekelle. The company will sell its waste material to butcheries and animal fattening centers for animal feed in the form of oil cakes. Since Yegaw’s oils are made of sesame and niger seeds, which are in high demand in the international market, they are particularly well suited for future export.

Source: Interview with Yegaw PLC General Manager, (May 24, 2008).

2. Cotton for textile production Cotton production is well integrated into the rest of the economy, with a large number of textile and garment factories relying on domestically-produced cotton for production. Opportunities for spinning, weaving and finishing textile fabrics, as well as processing of cotton, are significant. One company in particular, Maa Garment, is establishing a 4,000 ha cotton farm to meet its textile needs.

Box 9. Cotton investment

Maa Garment The cotton producer, Maa Garment, has expressed an interest in creating a full value chain for cotton products, including growing, processing, and finishing. The company is currently securing farmland to process up to 4,000 MT of cotton with on-site ginning and spinning. So far, Midroc, an investment group owned by Ethiopia-born Saudi billionaire Sheikh Al-Amoudi, has invested US$ 23.8 million (ETB 267 million) in the company (although the Tigray Investment Office indicates that the approved total amount of investment could total as much as ETB 491 million).

Sources: Midroc Ethiopia Technology Group, http://www.midroc-ethiotechgroup.com, and interview with Maa Garment General Manager, (February 28, 2008).

44 3. Forestry Alaje Forest Development, a Dejenna company, is the only forestry company in the Mekelle region. The company’s reserves cover approximately 16,000 ha. The only other forestry reserve in Tigray covers 4,000-5,000 ha and is owned by the Tigray Bureau of Agriculture.55 However, deforestation has been a significant problem in recent years and although resources are available for immediate extraction, a potential investor will find the Government will prioritize reforestation efforts. Thus, investors should proceed with the realization that they confront long return times on their initial investment.

Box 10. Forestry investment

Alaje Forest Development Alaje was established in 2005 as a private limited company by Dejenna, the foundation set up in 2004 by the Government to develop agricultural and natural resources in the Tigray region. Prior to that, Alaje was a publicly-owned and community-supported plantation project. It currently employs 78 permanent workers. It began logging in March 2008. The company’s reserves cover 16,000 ha, primarily in the southern zone, with limited operations in the eastern and central parts of Tigray. Of the total reserve area, 10,000-11,000 ha is forested. Estimated woodstock is nearly 500,000 cubic meters. The forest reserve is composed of 95 percent Eucalyptus trees and 5 percent indigenous species. Only eucalyptus wood is logged and sold.

Maichew Particle Board Maichew Particle Board is located approximately 125 km south of Mekelle in the town of Maichew. It began operation in May 2008 with a starting capital investment of US$ 19.6 million (ETB 220 million). The company produces a three-layer particle board ideal for small furniture industries made mainly of eucalyptus wood supplied by Alaje Forest Development. Maichew is the largest Dejenna company; it has a total capacity of 70 m3/day. It began operation with 210 employees and now has a potential workforce of 300.

Maichew has targeted the Ethiopian domestic market as well as several other East African markets. Chinese and Indian companies provide technical assistance, while all machines were purchased from German suppliers. The company’s operational constraints include: (1) difficulties ensuring high technical proficiency and attracting a talented labor force, and (2) difficulties communicating with suppliers, distributors, and clients due to inadequate information technologies at the remote factory site.

Source: Interview with Alaje Forest Development General Manager, (March 26, 2008).

55 Interview with Alaje Forest Development General Manager, (March 26, 2008).

H. Agricultural niche products

1. Spice industry Overview Spices are widely used in Ethiopian cuisine and the country has seen recent improvements in spice production and trade. Berbere is a widely used spice mixture produced primarily from red- hot capsicum (a vegetable). The red-hot capsicum also serves as an ideal source for the extraction of oleoresins, a naturally occurring mixture of oil and resin.

The world market for imported spices and culinary herbs is large, valued at just over US$ 2.3 billion. The main importers are developed countries (principally the EU and US). The majority of imports are raw with minimal processing.

Spice imports have grown on average 8.5 percent per year over the past five years. The increasing affluence of consumers in Asian, Latin American and Middle Eastern markets, as well as the growth in the demand for ethnic cuisine in many countries has spurred the sector’s growth.56

Current status The EU and the US are the two largest import markets for spices. Between them, they import over half of the world’s spices (32.1 percent and 22.5 percent, respectively). Singapore (8.7 percent), Japan (8.5 percent), Canada (2.8 percent), Malaysia (2.5 percent), and Mexico (2.2 percent) together import another quarter of world supply. Some developing countries such as Madagascar, the Comoros, Tanzania, and Malawi earn a substantial part of their foreign exchange from spice exports.57

Constraints Strong competition among developing countries makes entry into the spice market difficult. Spices best suited for production and export in Ethiopia include pepper, chilies, nutmeg, ginger, marjoram, oregano, and basil. However, importers and consumers are hesitant to accept spices processed and packed in many Least Developed Countries (LDCs) because of their perceived reputation for poor quality and possible adulteration. LDC exporters also are often unable to meet international food safety standards (e.g. Hazard Analysis Critical Control Points - HACCP) and quality assurance (e.g. ISO 9000) standards. As the spice industry in Ethiopia develops, these regulatory hurdles are noticeably diminishing.

Opportunities Spices such as paprika and capsicum for oleoresin are very suitable crops for smallholder farms, as they require high labor inputs and have a limited risk of perishing. Ethiopia’s long history of spice cultivation, appropriate climate, and large labor pool make it a market capable of producing significant quantities for export if developed further.

56 Elfring, op. cit. 57 Ibid.

2. Floriculture Overview Commercial floriculture is still a relatively new industry in Ethiopia, but it has emerged as a major export sector. The rose industry, for instance, has undergone successful development since its introduction in 1998. Ethiopia’s relatively inexpensive labor force ensures low production costs and, when there are high yields, provides Ethiopia with the potential to export to European markets. Mekelle’s international standard airport also provides a ready means for export.

Current status Companies currently operating in floriculture include Meskel Flowers (the first established company), Golden Rose, Ethio Flora, Summit Agro Industry and Teppo Agricultural Development and Trade Enterprise.

Opportunities Although floriculture development is concentrated near Addis Ababa, the Tigray Investment Office has indicated a strong willingness to support an investor interested in using Mekelle as a gateway to international markets, especially given that its international standard airport is now certified to provide direct exports.

Constraints The chief constraint is water – since Mekelle is relatively arid, floriculture will need to ensure consistent water access. The area around Aynalem, which has been identified as a potential area for floriculture development, serves as a source of potable water for Mekelle.

3. Incense and wild gum Although current production is negligible, a considerable amount of incense and wild gum potential does exist in the Tigray region. Reports indicate that in Tigray there are approximately 20,000 ha of land suitable for wild gum production and 100,000 ha of land suitable for incense plantation.58 (According to the Tigray Investment Office, approximately 300,000 ha of land are suitable for incense plantation in the Tigray region.)

4. Essential oils Rose Demascena: Rose Demascena is a plant used to produce essential oils for medicine and perfume. The oil production in Tigray is approximately 1.6 liter/ha (standard production is 1 liter/ha) with an average price per liter of US$ 6,000-7,000. Rose water and dried rose are two other products that can be produced in conjunction with the essential oil. Rose Demascena has already been introduced into several areas in Tigray and is in the process of being scaled up.

Moringa: Niche products such as Moringa and other essential oils and essences are typical low volume/high value products. The flavors and essences are used in the international food and cosmetic industries. Major manufacturers have recently researched and identified the potential of

58 Kindeya Gebrehiwot, et. al, “A key dryland tropical species in northern Ethiopia,” (Göttingen, Germany: University of Göttingen, 2002).

47 Moringa oil in East Africa. At present, unprocessed plants are exported and no essences or flavors are processed domestically.

5. Cactus products Cochineal: Food Safe Ethiopia, a Chilean conglomerate working in Tigray, is engaged in cochineal farming. Cochineal is an insect found on cactus plants that is processed to produce the Coche Carmen Aseed red food dye. Food Safe Ethiopia is involved in training 500 outgrowers in partnership with the German Development Agency (GTZ) to farm cochineal. The company has started to supply carmine to local companies in small quantities and was expected to achieve export capacity in June 2008. Although the company only exports raw cochineal, the Mexican company ALTECSA has shown interest in establishing a carmine extraction/processing factory in Tigray.

Cactus flower: A German company, Shewabe Pharmaceuticals, is currently buying dry cactus flower from Tigray for medicinal purposes. Research by the Tigray Agricultural Marketing and Promotion Association has shown that the cactus flower has anti-depressant properties and alleviates discomfort in patients with inflamed prostates. Tigray is currently exporting the dried flower as raw material at very low levels given relative supply. Future experimentation is necessary to determine the potential of the Adigrat Pharmaceutical Factory to manufacture medicine derived from the cactus flower.59

I. Agricultural support industries With the growing commercialization of the spice industry, there is growing demand for manufactured agricultural products, the provision of support services such as cold storage, the maintenance of tractors, harvesters, and grain silos, and services such as transport and marketing.

Box 11. Irrigation investment

Bruh -Tesfa is a Dejenna-funded company that delivers irrigation systems to large-scale farms throughout the country, particularly in the Tigray region. Although their distribution is currently limited to the Tigray, Amhara, Afar, and Addis Ababa regions, expansion plans are being finalized. As of early 2009, Bruh-Tesfa was the sole producer of drip irrigation supplies in Ethiopia and East Africa. Bruh-Tesfa has recently expanded efforts as a supplier of park development irrigation systems and established demonstration sites at Mekelle Airport, the Abreha Castle Hotel, the Hawelti monument, and adjacent to the soon-to-be-developed Millennium Park.

Source: Interview with industry participant, (May 2008).

59 Interview with Tigray Agriculture and Marketing Promoting Agency Agriculture (TAMPA) Specialist, (April 14, 2008).

48 J. Tourism Overview Given its magnificent culture and history, there is a great potential for Ethiopia’s tourism industry. Its attractions are many: Ethiopia possesses a unique historical and cultural heritage, breathtaking landscapes, a surprisingly moderate climate, rich flora and fauna, important archaeological sites and hospitable people.

The northern tourist circuit, known as the “Historic Route,” comprises the most important tourist sites in Ethiopia and is located almost entirely in Tigray and its border regions. Of particular note is the ancient city of Axum (a UNESCO world heritage site), once the center of a powerful empire and now the spiritual center of Orthodox Christianity in Ethiopia. An indicator of Ethiopia’s rich diversity is that within this “Historic Route” lies the Al Negashi mosque at Wukro – the most important site for Islam in Africa and a reminder of Ethiopia’s impressive religious tolerance.

Tourism has the ability to play an important role in joining different technologies, cultures and traditions together. The nearest tourist sites to Mekelle are the rock-hewn churches of Tigray (nearly all located within a 100 km radius from Mekelle), the Erte Ale volcano and the Danakil Depression of the Afar region. In many ways, Mekelle is an ideal place to link the historic and religious sites of the ancient Axumite kingdom, the rock-hewn churches and monasteries of Tigray, the Danakil Depression and Lalibela rock-hewn churches, the Gonder castles and the Semien Mountains National Park in the Amhara region. As the roads throughout the country continue to improve, it is likely that car-based tourism will become the predominant means of travel within the region. Previously, inadequate roads forced tourists to take airplanes to their destinations in the Tigray region. However, as car and bus travel increase in popularity, Mekelle could become an ideal hub for the many tourist sites of northern Ethiopia.

Current status Tourism in Tigray has steadily increased over the last 6 years. With only 4,412 visitors in 2001, the Mekelle region now receives more than 15,000 tourists each year. The Tigray region as a whole is estimated to receive as many as 100,000 tourists annually. A consultant has been hired by the Tigray regional government and is working on a tourism development plan for Tigray to strengthen both the region’s brand and accessibility. With respect to numbers of tourists, Germans comprise the largest demographic group, followed by Americans, French, Italians, Japanese, and Spanish. Ethiopia is expected to benefit further as the trend towards cultural and historical tourism grows.

The Hawzen district near Mekelle, site of the local Millennium Village, is visited by nearly 3,000 tourists every year. There are plans in development to capitalize on the luxury ecotourism market and develop a series of luxury tents to promote the cultural, historical, and religious resources of the region. So long as the region’s infrastructure improves, the area is poised to attract greater tourism.

Due to the many natural, historic and religious sites in the region, ecotourism provides one of the most viable sustainable business opportunities in the region. In particular, community-centered

49 ecotourism efforts, such as those found in the Millennium Villages, can play a crucial role in generating job opportunities.60

Opportunities There are numerous opportunities for tourism expansion in the region. Currently, there are only a handful of restaurants and hotels that cater to international tastes, although the Ethiopia-Saudi billionaire Sheikh Al-Amoudi is building a new luxury hotel on the site of the current Hilltop Hotel. The project highlights the potential for growth in the tourism sector in Mekelle. Lodges such as the one recently completed near Hawzen by an Italian investor offer additional investment opportunities.

Constraints The Tigray Tourism Office has acknowledged that the region has been poorly promoted in the past. As a result, few international tour companies send tourists to Ethiopia. In Mekelle, only seven hotels have a star rating of any type and together, they hold only 400 occupants. Only two tour operators are based in Mekelle, although many others use the city as a transit hub. Other factors hindering Mekelle’s development as a tourist center include:

• Limited city infrastructure. • Limited regional road network. • Unplanned growth in urban areas. • Poor economic linkages to attract tourist dollars. • Poor management of tourist attraction sites. • Poorly conserved natural resources.

60 Millennium Villages Project (MVP). Business Plan for Ecotourism (Hawzen, Ethiopia: Millennium Villages Project, 2008).

Box 12. Tourism investment

Millennium Villages ecotourism The Millennium Villages ecotourism project in Gheralta, Tigray aims to create tent lodge systems for five local villages. However, the main challenges of the project include the need to locate investors and attract tourist dollars to the villages. Possible activities at the sites include horseback riding, rock climbing, trekking, and cultural tourism.

Currently, 3,000 tourists visit the Gheralta area each year. The tourist potential of the region is widely acknowledged and, in conjunction with tourist sites in Axum, could play a central role in a regional development plan. The Millennium Villages ecotourism business plan calls for an investment of US$ 1.5 million to establish five tent lodge sites connected by scenic trails in a loop structure. Construction on the first two sites would occur in 2009. The Tigray Tourism Office optimistically projects 120,000 visitors to Tigray by 2012, up from 15,000 per year currently.

Source: Millennium Villages Project (MVP). Business Plan for Ecotourism (Hawzen, Ethiopia: Millennium Villages Project, 2008).

K. Manufacturing Manufacturing, while not significant for the export market, is growing rapidly to meet domestic demand. Total revenue generated in 2006/2007 amounted to US$ 380 million (ETB 4.3 billion), representing an increase of 19.8 percent from the previous year. However, only 7 percent of the total sales are generated from exports.

Dependency on imports: A major obstacle to profitability in this sector is the dependency on imports. This is mainly due to raw materials that are either not found in Ethiopia (e.g. all metal and plastics must be imported), not easily accessible (e.g. due to poor roads), or are partly of poor quality. The heavy dependency of Ethiopian manufacturing on imported raw materials is a noticeable and continuing concern for operations and expansion.

Operation below capacity: Another problem for the Ethiopian manufacturing industry is the history of operating below capacity. Collectively, the manufacturing industry utilized only 54.6 percent of its production capacity in 2006/2007 (which represented no significant improvement from the previous fiscal year). Among the industries surveyed by the Central Statistical Agency of Ethiopia (CSA), approximately 84 percent of them operate below 75 percent capacity, while 56 percent operate below 50 percent capacity.

51 Table 5: Business survey results for manufacturing industries

Table 6: Reasons for manufacturers working below full capacity

Among the 699 businesses surveyed, 76 percent have been in operation for more than eight years. The findings of the survey indicated that the lack of domestic and foreign demand is the primary reason for below capacity production. Shortages or irregular supplies of electricity, water, and raw materials also negatively impacted manufacturing performance. None of the industries interviewed mentioned factors such as “problems with workers,” “lack of skilled manpower,” “government rules and regulations,” or “shortage of foreign exchange” as reasons for operating below capacity.61

61 Government of Ethiopia, Census 2007, op. cit.

52 Despite the availability of raw materials and a ready market for industrial products, there has been little development in recent years in manufacturing in Tigray. The Tigray Investment Office’s preparation of 180 project profiles was a first attempt to motivate investment in manufacturing (see Appendix 1).

Two entities, namely EFFORT, and to a lesser extent, Dejenna, have been leading efforts to promote manufacturing and industry in Tigray. For a full description of their activities, please refer to Chapter 4.

Box 13. Manufacturing investment

Messebo Cement Messebo Cement is the largest corporation in Mekelle. It was established in 2000 through the EFFORT program and occupies a 200 ha site to the north of the city. Messebo currently produces 900,000 tons of cement per year, which should increase to about two million tons/year after a two-year expansion is completed in late 2009. The need for an expansion was borne from increasing demand resulting from a construction boom in the country and increased interest in concrete roads (which offer a 50-60 year life span as opposed to the 10-year timeline of asphalt roads). Currently, 40 percent of total cement production is sold to buyers in Addis Ababa.

Using locally-available volcanic ash, Messebo has been able to increase its productivity by 30 percent recently. The vast majority of its raw material is sourced within 3 km of Mekelle. Iron ore (which is also an important, albeit small, ingredient in cement) is also found within 30km of the city.

With 700 employees, about half of whom have at least a high school diploma, the company can potentially help facilitate the growth of many complementary service-oriented industries in the region (e.g. guard services, trucking companies, etc). However, until there is greater demand, concrete will continue to be sold “at the gate,” including the share that is sold to the Addis market.

Source: Interview with Messebo Cement General Manager, (April 3, 2008).

Box 14. Metal and engineering investment

Abyssinia Flats Products PLC The Kenya-Indian company Ethiopian Steel PLC is the only large-scale foreign investor without previously established ties to the region. Abyssinia Flats Products PLC is the fifth factory established in Ethiopia by Ethiopian Steel PLC. The company is well positioned to profit from the scrap metal reprocessing potential of the Tigray region. The company produces reinforcement bar, angle iron, and flat bars. However, it only produces on a contract basis for wholesalers.

Ethiopian Steel PLC’s other factories currently manufacture reinforcement bar, angle iron, channel iron, and cement. In Mekelle, it will manufacture at the rate of 3,500 tons per month with an initial capital cost of US$ 8.5 million (ETB 96 million), 30 percent of which will be financed through its own assets and 70 percent through bank loans.

Although the company is seeking to commence production as soon as possible, there have been some delays in land acquisition. These delays have caused additional costs, including warehouse rental expenses in Djibouti for imported production machines, and the erection of a shed over the construction site to protect it during the rainy season. Ultimately, the 5.5 ha steel reprocessing factory is ideally situated in Mekelle, as it will no longer be necessary to transport scraps to Addis Ababa for reprocessing.

Source: Interview with General Manager of Abyssinia Flat Products PLC, (June 3, 2008).

L. Mining Overview There is currently minimal investment taking place in the mining sector in Tigray. However, notable mineral and stone deposits indicate the potential for significant mining activities in the future.

Current status Ezana Mining Development has the responsibility to explore and develop mines in Tigray.

Opportunity There is significant opportunity for investment in the mining sector in Tigray. Mineral exploration studies conducted so far indicate that within several hundred kilometers of Mekelle there are significant deposits of: • Metallic minerals (such as gold, copper, zinc, lead, iron, nickel). • Industrial minerals (such as silica sand, kaolin, graphite, limestone, and gypsum). • Dimension stones (such as marble, granite, greenstone, limestone and slate). • Gemstones (such as agate, jasper, and chalcedony).

In particular, Mekelle and its surrounding area possess large quantities of limestone, marble, clay, dolerites, vermiculite (a horticulture medium) and sandstone. Surface salt deposits

54 amounting to 9 billion tons are located on the nearby border with the Afar region. Only 20,000 tons of salt is mined in the region on an annual basis.

Constraints The most immediate constraint to development of a mineral processing facility in Mekelle is the distance of the city from mine sites. Although some sites are closer than others, there are few access roads leading to them. The proximity of prospective mine sites to Mekelle ensure that the city will receive at least tangential benefits, since most mine processing is done at or near the mining site. Another constraint to development is the presence of landmines in some mining areas, particularly near the Eritrean border.

In a similar vein, the length of time necessary to complete environmental impact assessments (typically one year although recent efficiency measures have sought to shorten this process) and the remediation measures necessary for older mine sites (such as the cyanide removal under way in one Derg-era mine), indicate the potential for collateral risk exposure and present the possibility of additional costs.

Box 15. Mining investment

Ezana mining development Ezana’s main responsibility is to explore the mining potential of the Tigray region. The mineral exploration company possesses the only mineral laboratory capable of detailed sample analysis in Tigray. It was established by EFFORT, the government-initiated investment corporation, with an initial investment of US$ 3.6 million (ETB 40 million). Its main goals are to map the region’s resources and pursue extraction. It has a staff of 50.

Currently, there is almost no mining development in Tigray led by the private sector, although two Chinese companies and an Egyptian company have shown interest. Other foreign investors include Ashanti Gold (a Ghana mining company), which is pursuing potential mining claims throughout Ethiopia and would look to systematize the mining process and increase production.

Mining laws at the federal and regional level govern the activities and responsibilities of foreign and domestic investors. After the acquisition of land, the establishment of mining rights is a relatively simple process that requires a one-month newspaper announcement. If no claim to the property has surfaced within this timeframe, an investor can proceed with mining.

Mekelle Gemstone The Mekelle Gemstone factory is still being constructed. Mining will take place in the nearby Afar region while the processing facility, expected to employ 20 technical staff, will be located in Mekelle. Mekelle Gemstone finished the nearly two-year construction of its production facility, located in the Mekelle industrial zone, in early 2009. Although it has experienced some delays in cement acquisition due to the 2008 construction boom, it has benefited greatly from the assistance of Australian partners and the Tigray Investment Office. The company’s directors also own a metalwork shop and clothing store which were used as collateral to receive a 50 percent bank loan and avoid any major banking or financing difficulties.

Sources: Interview with Ezana Mining General Manager, (February 29, 2008); Interview with Mekelle Gemstone Owner, (May 25, 2008).

M. Service industries

1. Information technology There are several small-scale firms working in the information and communication technology (ICT) sector in Mekelle, as well as a number of institutions of higher education. The Mekelle Institute of Technology (MIT) is the premiere school in this field; it graduated its first class of 146 students in 2007. The school’s focus on electrical engineering, mechanical engineering, information technology (IT), and biogenetics places it in an optimal position to support the city’s ICT growth.

56 2. Health and education There are severe challenges with respect to health and education services in Mekelle. However, the number of private hospitals, clinics and schools are growing and their success shows that there is market demand for services in the social sectors.

57 Chapter 4. Mekelle operating environment

A. Infrastructure Ethiopia has historically suffered from poor infrastructure development. Due to political divisions, Tigray has been particularly neglected with respect to infrastructure improvement and government-led development projects. However, in the nearly two decades since the fall of the Derg regime, infrastructure improvement has been a primary focus of the regional and federal governments.

B. Energy Although Ethiopia has not experienced widespread electricity shortages during the last several years, the first half of 2008 was marked by chronic power outages. At the national level, the Ethiopian Electric Power Corporation (EEPCO) maintains a national grid, the Interconnected System (ICS), which is mainly supplied by hydropower and by the Self Contained System (SCS), which includes isolated diesel units and small hydropower projects. The ICS consists of one geothermal, eight hydropower, and twelve diesel plants with a total capacity of 7.3 MW, 662.6 MW, and 113.44 MW, respectively. However, due to the age of the plants, their combined operating capacity is limited to between 620MW and 780 MW, representing close to 100 percent of the country’s energy capacity. The SCS consists of three small hydropower plants and several diesel power plants. Within the SCS, the diesel plants have an aggregate capacity of 32.87 MW, while the hydropower plant produces only 6.15 MW. As of 2008, the company possessed 8,747 km of service lines supplying electricity to roughly 20.3 percent of the country’s population. (During power shortages in 2008, Mekelle was supplied by the SCS.) The construction of six additional hydropower stations is expected to alleviate previous energy constraints and the construction of a 120 MW wind power station near Mekelle will be the first of its kind in Ethiopia.

The combination of large-scale expansion throughout rural areas (with huge increases in loss rates as inefficient lines are spread across greater distances), unprecedented urban growth, and an unusually arid dry season led to chronic energy shortages in 2008 throughout Mekelle and the rest of the country. Mekelle itself utilizes 12-13 MW of energy. With the recent shortages, standby diesel plants (decommissioned plants now kept as auxiliary power sources) have been operating constantly. During the most recent shortage, industrial areas, although prioritized to receive electricity during the day, were frequently not supplied with power from 6pm-10pm every night.

Energy rates are set by the Ethiopian Federal House of Representatives, although they are slow to respond to demand or availability. As a result, the Ethiopian system lacks crucial supply and demand controls. However, Ethiopia has aggressively sought to improve its power supply most notably through several massive hydroelectric projects that will come online in the next several years and should help transition the country from an energy deficient country to an energy exporter. The largest of these is the 300 MW Tekeze plant originally scheduled to open in late 2007. Running behind schedule, the plant opened at 75 MW capacity in October 2008. According to EEPCO, full production capacity should be achieved by 2010.

58 While investment is encouraged in the energy sector, projects rely heavily on foreign technical assistance, although foreign companies themselves are not permitted to directly invest in energy production. However, the future of this policy is uncertain as a European investor is currently developing a 30 MW wind farm in Mekelle. If the European developer is not allowed to operate the facility, EEPCO will simply purchase the constructed wind farm.62

C. Water and sanitation Water demand far outstrips the city’s water supply. In 2008, the maximum demand for water was 23,000 m3/day, whereas the supply was limited to only 11,000 m3/day. 63 The Mekelle Water Supply Office projects that by 2012 the city will need 38,000 m3/ day. Supply limitations are further compounded by the fact that the Mekelle Water Supply Office was recently given additional sewerage responsibilities.

The city currently operates 12 bore holes at a depth of 120-240 meters each. The city is planning to increase its water supply capacity by drilling 11 additional bore holes at a depth between 250 and 350 meters. Long-term plans focus on the potential for dams to offer the most dependable source of water for the city.64 The Gaba River to the immediate northwest of the city would, in conjunction with a treatment plant, provide sufficient water for the future needs of the city. Due to the city’s heavy rainfall during the rainy season (particularly in May, June, and July), rainwater harvesting at the Gaba damn could represent a viable means of water storage.

Currently, the water supply office informs businesses when shortages are imminent. In case of shortages, they request that businesses keep a two-to-three day reserve. Some businesses have a water truck for this purpose while large industries, such as Maa Garment and Messebo Cement, prefer to operate their own wells.

The status of liquid waste management in Mekelle is also less than ideal. With no centralized network (other than a 19 km closed and 11.6 km open ditch built for storm water drainage), the city relies on the services of four registered vacuum trucks operated by private companies. As a rule of thumb, waste management is the responsibility of each individual company. However, few companies in Mekelle possess waste treatment facilities, other than Sheba Tannery, Desta Alcohol and Quwir Garage. When questioned about this, most businesses cite a closed loop industrial cycle that utilizes waste or scrap material.

Solid waste management in Mekelle is currently undergoing a period of reorganization. The City’s Business Process Reengineering Team will implement its recommendations in 2009 to improve industrial and residential waste management. Governmental policy currently requires industries to pay for their waste disposal. As a result, most businesses contract outside private collection companies that rarely practice proper waste management techniques of hazardous and industrial solid waste. These companies typically dump the waste in open dumping sites or landfills. The residential collection rate is between 35 and 50 percent.65

62 Interview with EEPCO Tigray Regional Director, (April 24, 2008). 63 Based on projections provided by Mekelle Water Supply Director, (April 20, 2008). 64 Interview with Mekelle Water Supply Director, (April 20, 2008). 65 Interview with Sanitation Department Head, (March 14, 2008).

59 D. Transport Ethiopia’s surface transport infrastructure, primarily consisting of roads, is inadequate and underdeveloped. In fact, Ethiopia has the lowest road density per capita in the world. Only 21 percent of highways are paved, with few interconnecting roads between adjacent regions, and a grossly insufficient feeder road network. As a result, large parts of Ethiopia remain isolated and largely dependent on pack animals or human transport. Limited rail service links Addis Ababa with Djibouti via the eastern Ethiopian city of Dire Dawa, although it is currently undergoing extensive repairs. However, air service is widely regarded as being among the best in Africa with domestic passenger and cargo air transport service provided by Ethiopia Airlines. Ethiopia Airlines has international flights that link the country with 53 cities on five continents, and its domestic service links 43 airfields and 21 landing strips with Addis Ababa.66 With the recent addition of an internationally certified airport capable of servicing all passenger and cargo needs, Mekelle has added a vital element for international competitiveness. As a result, Ethiopia now possesses over a half dozen international standard airports.

On the national level, much emphasis has been placed on upgrading the existing main road that connects Tigray with the port of Djibouti, Addis Ababa and other main regions. In the Tigray region alone, there is a total of 5,900 km of roads; 1,419 km of which are administered by the Ethiopian Road Authority (ERA), and 1,131 km administered by the Tigray Region Road Authority (TRRA). The remaining 3,349 km is dry weather community road. The road density of the region rests at 47.22 km per 1,000 square km of land.

The city of Mekelle has 263 km of roadways, of which 40 km are asphalt roads, 63 km are gravel roads and the remaining 160 km are unclassified dirt roads. An additional 88 km of asphalt roads are being planned. Only 24 km of asphalt roads are rated in “good” condition by the Department of Roads, while the remaining 16 km are rated in “poor” condition and require maintenance. Mekelle has street lighting that covers 180 km. Of this amount, 30 km are sodium lights, 60 km are florescent, and 60 km are incandescent. In addition, large-scale cobblestone projects are underway to convert 30-40 km of dirt roads into cobblestone streets in the heart of the city.67

Table 7: Transport distances from Mekelle and Addis Ababa

PORT SUDAN MASSAWA ASSAB DJIBOUTI BERBERA

1788 km via 391 km via 899 km via 940 km via 837 km 680 km 1736 km via MEKELLE Kasala, Asmera, Eli Dar, Kombolcha, via via Serdo, Addis, Metema, Azero, Adigrat Kombolcha, Weldia Mile, Afdera, Kombolcha, Weldia Weldia Chifra, Shiket, Weldai Alewha Mekelle 1881 km via 1163 km via 869 km via 910 km via Gelafi 964 km via ADDIS Metema, Azero, Mekelle, Kombolcha Dire Dawa ABABA Anjibara Weldai, Kombolcha Source: Tigray Investment Office, Tigray Investment Guide (Tigray, Ethiopia: Tigray Investment Office, 2008).

66 Government of the United States, Doing Business in Ethiopia: A Country Commercial Guide for US Companies, (Washington, DC: US Commercial Service, 2007). 67 Interview with Road and Construction Department Head, (March 14, 2008).

E. Telecommunications The Tigray region, for the most part, has reliable access to telecommunications (fax, internet, mobile, etc.). In addition, cooperation with Chinese technical assistance groups is improving saturation and service delivery. Internally, direct microwave telephone links are available in most regional cities; a number of smaller towns also have automatic telephone services. International communication is maintained through two satellite earth stations that provide telephone, telex, and television services. Digital telephone exchanges, mobile telephone and internet services have also been installed recently.68 The Ethiopian Telecommunications Corporation has begun an US$ 133 million (ETB 1.5 billion) expansion project through a vendor-financing scheme with the Chinese company ZTE.69

F. The financial sector The National Bank of Ethiopia (NBE) is the country’s central bank. Commercial banking takes place through the Commercial Bank of Ethiopia (CBE) and a number of private banks (with Dashen Bank offering the most advanced services, followed by Wegagen Bank, Abyssinia Bank, United Bank, Awash Bank, and Lion Bank). The CBE and the private commercial banks offer savings and checking accounts, short-term loans, foreign exchange transactions, and mail and cable money transfer services. They also participate in equity investments, provide guarantees and perform other commercial banking activities.

Nine commercial banks (three government-owned and six private) currently operate within Ethiopia. These include two specialized banks, the Development Bank of Ethiopia (DBE) and the Construction and Business Bank (CBB). The DBE, with its 32 branches, extends short, medium and long-term loans to viable development, industrial and agricultural projects. The CBB provides long-term loans to construction developers (for home construction materials such as concrete blocks, roofing materials, etc.). It also funds the construction of private schools, clinics, hospitals and other real estate.

Foreign banks have not yet been allowed to enter the finance sector. According to the Government, this will remain the case until such time as domestic banks have attained greater competitiveness and the NBE’s supervisory and regulatory capacity is strengthened. Private banks operating in the capital and other major cities include Awash, Dashen, Abyssinia, United, Wegagen and Nib. In addition to banks and insurance companies, micro-finance institutions play an important role in providing credit and saving facilities. There are now more than 20 microfinance institutions operating in different regions of the country. Notably, the largest microfinance institution in Africa, the Dedebit Credit and Savings Institution (DECSI), is based in Mekelle. It manages 98 savings and credit agencies and has a staff of approximately 1,300 people.

68 Government of the United States, Doing Business in Ethiopia, op. cit. 69 Government of the United States, Ethiopian Investment Climate (Washington, DC: US Department of State, 2007).

61 Foreign enterprises formally registered in Ethiopia are entitled to access domestic credit on the same terms and conditions as Ethiopian companies. Exporters, including foreign enterprises, may also have access to external loans and suppliers’ or foreign partners’ credit in keeping with the directives of the NBE. Foreign investors must have their investment capital, external loans and suppliers’ or foreign partners’ credits registered with the NBE.

Ethiopia does not have a securities market, although a private sector initiative to establish a mechanism for buying and selling company shares is under discussion. While credit is available to investors on market terms, the 100 percent collateral requirement limits some potential investors. Export-oriented investors can borrow from the special fund at the DBE without one-to- one collateral for an amount of up to 70 percent of the project cost. The CBE holds approximately two-thirds of the assets of the entire banking system.70

G. Mekelle Industrial Zone The current industrial zone is located on the northern edge of Mekelle and has been recently expanded with the addition of 22 ha for heavy industry. The expansion was prompted by the rapid allocation of the original 60-ha site to small and medium-sized enterprises (SME). While indicative of the interest in entrepreneurial activities, it is important to note that the original area was provided at a highly reduced rate of US$ 0.07 (ETB 0.75) per m2/year. Since 2006, only 20 percent of planned businesses have begun operation.71 Each SME was allocated on average 1 ha.

The Tigray Investment Office is in the process of creating a heavy-duty industrial zone consisting of 500-600 ha that would be located in the area immediately southwest of the 200 ha Messebo cement factory. 80 ha were slated for development during the 2008/2009 fiscal year. The Mekelle Department for City Planning will administer the area while the Tigray Investment Office will provide technical support. Only 16 of 80 ha had been allocated as of June 2008,72 allocated mainly to the following four companies: Abyssinia Flats Products PLC, the EFFORT Corporation’s Mesfin Industrial Engineering company, Dejenna’s Abergelle Slaughterhouse, and the Dejenna Romanat Laminate factory.

Significant World Bank funds are also being made available for infrastructure improvement in Tigray. The German Development Agency (GTZ) is working closely with the local government to ensure the effective use of funds. Part of this work involves executing an extensive infrastructure inventory. This report will be updated periodically to provide the most current information on Mekelle’s infrastructure, and will be available at the Tigray Bureau of Trade and Industry.

H. Land administration Under Ethiopia’s land tenure system, the Government owns all land and provides long-term leases to tenants. As land is public property, individuals, companies and other organizations have only the right of land use. Peasant farmers are placed in a separate category and are granted use rights for an indefinite period. They also have the right to transfer the land to legal heirs and to

70 Ibid. 71 Interview with Tigray Investment Office Head, (April 24, 2008). 72 Ibid.

62 lease it to third parties. However, the maximum limit on rural landholding has been set at 10 ha per household. There are two broad classifications of land for lease purposes: rural land and urban land, of which rural land is leased mainly for agriculture. Abandoned and unused government land is primarily available for investment.

The lease price of rural land is generally very low, but its use is limited by infrastructure. Although there is some rural land with developed infrastructure in proximity of markets, such land is usually only available to farmers living within 100 km of major cities. The Government does retain the right to relocate peasant farmers from land to which they have use rights. Although the process by which this occurs varies, all parties appear sensitive to the need to have just compensation and fair dealings when interacting with rural farmers. The farmers are compensated by the Government (in 2008 at the rate of US$ 8,500 (ETB 96,000) per ha for permanent expropriation). This sort of land is provided to investors in floriculture and horticulture at very reasonable lease rates.

Urban land is divided into land for industrial use and land for other activities. Industrial land is often prioritized by the Government and the necessary infrastructure (roads, electricity, water, telephone) is facilitated. Industrial land in Addis Ababa and in parts of the Tigray, Amhara and Oromia regions are available at low fixed prices. Land for export-oriented industries is also generally available at very low rates. The Ethiopian Investment Agency (EIA) now has the power to facilitate the acquisition of land by FDI projects throughout the country. Urban land for other activities is available on an auction basis. In principle, the lease value of the land, as well as the fixed assets on it can be mortgaged or pledged as collateral, and banks may accept such collateral, although typically at a discounted rate. In practice, these transactions are slow and not very efficient.73

In Mekelle, the Office of Land Administration is housed at the main municipal building. The Department Head oversees the transfer and title authorization of land. The Department Head at the City Planning Office oversees large land transfers. Individuals leasing land are given a certificate of possession for a fixed lease period (certificates are of varying lengths).

In order for an investor to request land, the procedure is as follows: 1) A project proposal is submitted to the land administration office. 2) The submitted proposal is sent to the team leader to determine feasibility. 3) The proposal is forwarded to the urban planning office. 4) The investor receives a notice regarding potential allocation of requested land.

Land lease costs depend on the type of the investment. If at least two of the three criteria are met, then the investment is determined to have high socio-economic value and land is made available at a rate of US$ 0.07 (ETB 0.75)/m2. The three criteria for determining socio-economic value are: (1) the project must be labor intensive, (2) the project must involve new technology, and (3) the investor must possess a minimum starting capital amount of ETB 40 million (approximately US$ 3.6 million), although indications suggest that this requirement is not strictly enforced. Once

73 UNCTAD. Investment Policy Review, (Geneva: UNCTAD, 2004).

63 an investor has been approved through this process, leases are typically transferred by the city administration within two months.74

I. Human resources Visitors are often impressed with the quality of the country’s labor force, which is estimated at 35 million. 85 percent of the labor force are employed in subsistence agriculture. The government and armed forces are the most important sectors of employment outside agriculture and provide work for almost three million people. The number of permanent and temporary workers employed in public sector manufacturing increased from 78,000 in 1978 to over 300,000 by 1999. Approximately 40 percent of the urban workforce are unemployed. High urban unemployment is partially offset by an informal economy. While labor remains readily available and inexpensive throughout Ethiopia, skilled manpower is scarce in many fields. Further, only about 300,000 workers are members of labor unions (civil sector employees are not allowed to form unions). Ethiopians also have a good understanding of English, which is mandatory for all students starting in middle school. High school classes are also taught in English.75

J. Bureau of Capacity Building Ethiopia’s Bureau of Capacity Building aims to improve Ethiopia’s development prospects in four areas: (1) by reforming rules and regulations at a regional and municipal level; (2) by helping meet human resource needs, including by training civil servants (the bureau has trained 60,000 civil servants since its inception in Tigray several years ago), processing complaints and evaluating salary scales; (3) by promoting good governance as established by World Bank standards; and (4) by supporting ICT expansion and the creation of e-government tools such as video conferencing and computer documentation.

The offices of the Bureau of Capacity Building include 80 permanent employees and 10 UN volunteers with 34 offices in 11 major towns. The office has spent US$ 22 million since its inception in 2006. Reform efforts include tax and justice reform, urban capacity building, financial management reform, revenue collection, and technical vocational education (TVE), which targets small and medium enterprises and provides entrepreneurial skills training. These reform efforts follow the BPR model.76

Human resource reforms have primarily emphasized improving job evaluation, management reform, computerized systems, and revenue collection. Good governance programs have largely focused on improving governmental responsibility and efficiency and promoting privatization. The Office of Capacity Building seeks to include the private sector in areas previously reserved for government control. This is a frequent feature of many BPR efforts.

ICT efforts by the Bureau of Capacity Building overlap with other national e-government and technology implementation measures, including extensive videoconferencing at most levels of government with a special emphasis on using videoconferencing to assist court adjudications. Computers have been introduced at all levels of government and training efforts are helping to

74 Interview with Head of Department of Urban Planning, (April 19, 2008). 75 Government of the United States, Ethiopian Investment Climate. op. cit. 76 BPR is a management approach aimed at improving the efficiency and effectiveness of an organization through redesigning the way work is done to better support the organization's mission and reduce costs.

64 ensure their effective utilization. UN volunteers are heavily involved in this area, especially in Mekelle, Shire, and Adigrat.77

K. Tigray Bureau of Rural Development and Agriculture The Tigray Bureau of Rural Development and Agriculture oversees cereal crop production, regulation, livestock, and irrigation. It also maintains a Natural Resource Development Department that focuses on soil conservation and forestry, and an Agriculture Input and Marketing Department that supplies modern inputs to promote urban-rural linkages and agriculture-based cooperatives.

The Bureau of Agriculture maintains a close relationship with the Bureau of Trade and Industry, as many of their activities overlap. Because the region stretching from Samera to Raya, 60 km south of Mekelle, is ideal for cotton production, the two Bureaus are developing plans to promote cotton, Tigray’s second largest export after edible oilseeds. Because it is non-perishable and packable, cotton is not as susceptible to the problems of a landlocked arid region with concentrated periods of rainfall. For similar reasons (i.e. geography and climate), the Bureau of Agriculture has also delineated an area near Mekelle for gum arabic production. Flowers and animal feed processing are also markets that the Bureau of Agriculture expects to support heavily in the coming years.78

L. International development efforts in Mekelle The German Development Agency (GTZ) has dedicated a substantial number of staff to help implement World Bank projects in Ethiopia. The 19 largest cities in the country have already received assistance from the World Bank, including four in Tigray. The four Tigray cities of Mekelle, Adigrat, Axum and Shire are also supported by the Construction and Urban Development Bureau (BWUD) of the Regional State of Tigray. To help implement the project, the Bureau established a regional committee for Tigray, directed by the deputy head of BWUD’s planning department. The committee consists of a civil engineer from BWUD, and three experts from the GTZ-UGDP Tigray team. Each region in Ethiopia that receives World Bank funding receives this type of support from GTZ. GTZ further supports the urban sector by directing urban studies and assisting in the development of policies and programs, as part of the first phase of the World Bank-funded Urban Governance and Decentralization Programme (UGDP).

The main goals of the program are (1) to enable cities to provide better services to their citizens, and (2) to promote good governance. The first phase of the program is being implemented currently (2008-2011) and includes the cities of Mekelle, Adigrat, Axum and Shire/Indaselassie. Currently, the cities are working to prepare 3-year capital investment plans (CIP) to cover the first phase of the program and demonstrate capital investment needs. The CIP is being prepared with public and private input from various Kebeles (the smallest administrative units) throughout Mekelle, with input and discussions with various government departments and officials. A primary purpose of the CIP is to provide officials and citizens with a process for planning and

77 Interview with Director of the Bureau of Capacity Building, (May 22, 2008). 78 Interview with the Natural Resources Department Head at the Tigray Bureau of Rural Development and Agriculture, (May 30, 2008).

65 budgeting in accordance with capital investment needs and to make the best use of scarce financial resources.

Changes over the next several years can be expected as local governments seek to maximize regional and municipal resources to promote more efficient city governance. This process is expected to result in improved tax collection, which should improve the capacity of the Government to fund public works projects. The implementation record so far has been positive as evidenced by an asset management project to create GIS cadastral maps for the city.79

Other notable international organizations currently working in Mekelle include the World Food Program (WFP) and the United Nations Mission to Ethiopia and Eritrea (UNMEE). The World Food Program began operations in response to repeated famines in Tigray and established a regional office in Mekelle through which they organize large food movements and provide food security support. The UNMEE was established after the 1998-2000 Ethiopian-Eritrean War in response to simmering hostilities between Ethiopia and its neighbor to the north. However, UNMEE has struggled in its mission to improve border relations between the two countries.

M. Holding companies in Mekelle The private sector in Mekelle is dominated by domestic companies with the EFFORT and Dejenna companies functioning as the primary players in the Mekelle economy. In May 2009, the two companies merged, which should lead to greater efficiency among the respective companies. For the purposes of this report, however, we refer to the two companies separately since the merger is recent and no public documents are yet available specifying changes in the company structures.

Additionally, SMEs are given extensive government support and play a crucial role in some light industry and service oriented businesses.

1. EFFORT Corporation80 The EFFORT Corporation was one of two large government-initiated investment entities committed to sustainable development through successful competition in the global market. EFFORT explores and invests in specific business opportunities in order to promote regional economic development.

More specifically, EFFORT establishes manufacturing and service businesses that utilize locally available raw and semi-processed materials. Frequently, this mandates production of goods and services employing labor-intensive capital (thus creating employment opportunities and reducing production costs) and involvement in agro-industries. Since the 2002 economic downturn, EFFORT has sought to revitalize its companies through streamlining and emphasizing its most profitable production areas. The corporation is seeking joint partnerships with foreign investors.

Currently, there are 13 EFFORT Endowment Companies including: Addis Pharmaceutical Factory, Almeda Textile, Experience Ethiopia Travel, Express Transit Service, Ezana Mining

79 Interview with GTZ Engineering Officer, (March 28, 2008). 80 Interview with EFFORT Business Development Department Head, (May 4, 2008).

66 Development, Guna Trading House, Hiwot Agricultural Mechanization, Mesfin Industrial Engineering, Messebo Building Materials Production, Saba Dimensional Stones, Sheba Tannery, Sur Construction, and Trans Ethiopia.

2. Dejenna Endowment The Dejenna Endowment was founded in 2004 to develop agricultural and natural resources in Tigray. Its organizational structure is identical to EFFORT in that it is a foundation with a number of limited companies under its control. Dejenna receives funding from several sources including the Government and various NGOs. Dejenna operates with a board and CEO to whom each of its companies must submit evaluation reports. Dejenna controls all high level hiring for its companies, although its day-to-day operations are autonomous. Other companies that should be established under Dejenna in 2009 include a flower production center, a wood briquette factory that utilizes waste products from particle board, a dairy processing facility that works closely with the Abergelle Slaughterhouse, and a plastic packaging factory for concrete.81

There are currently seven Dejenna Endowment Companies: Abergelle Livestock Abattoir and Fattening, Alaje Forest Development, Bruh-Tesfa Plastic Products, Dimma Honey, Maichew Particle Board, National Geo-Textile Gabion Factory, and Plant Tissue Culture.

N. Doing business in Mekelle There are a number of agencies in Mekelle that help facilitate investment, including the Tigray Investment Office (TIO), Tigray Agricultural Marketing Promotion Association (TAMPA), Tigray Development Association, and Mekelle Chamber of Commerce.

1. Tigray Investment Office (TIO) The Tigray Investment Office operates as the official licensing body for all domestic investment and assists foreign investors once the Federal Ethiopian Investment Commission has issued an investment license. One of the agency’s main responsibilities is the oversight of nine industrial zones throughout Tigray. The agency also helps promote industrial investment in the city.82

2. Tigray Agricultural Marketing Promotion Agency (TAMPA) The Tigray Agricultural Marketing Promotion Agency was established in 2004. Its main objective is to provide a rural development strategy to increase crop values, and improve the efficiency of farms throughout the country. TAMPA is comprised of three departments: (1) Market Research and Information; (2) Market Infrastructure and Promotion; and (3) Contract Farming and Farming Coordination. TAMPA is a semi-autonomous governmental body that reports to a Board of Directors composed of various governmental offices including the Director of the Regional Business, Trade, and Industry Office. The Board’s chairperson is the Tigray Regional President.83

TAMPA carefully tracks supply and demand prices for all agricultural products in the Tigray region and provides the most accurate and up-to-date information for agro-processing ventures in

81 Interview with Dejenna Business Development Office Head, (May 5, 2008). 82 Interview with Tigray Investment Office Head, (March 16, 2008). 83 Interview with TAMPA Director, (April 3, 2008).

67 Mekelle. The company also provides assessments of competitors. In late 2008, TAMPA produced their first due diligence reports on potential value-added industries. It is utilizing communication sources including radio, Internet, newspapers, newsletters, and notice boards to disseminate information.

Currently, the avenues available for the promotion of investment in Tigray are limited to Ethiopian Embassies and academic networks through Ethiopia’s rapidly expanding university system. Through these networks and through targeted outreach, TAMPA has signed several contracts with foreign investors for property and production rights. TAMPA also assists investors with visits to Ethiopia. Further, the agency sent eight Ethiopian companies to India in May 2008 in order to promote agro-processing opportunities. 84

3. Tigray Bureau of Trade and Industry The Bureau of Trade and Industry places an emphasis on improving good governance, service delivery, and infrastructure. It maintains 40 SME branch offices throughout Tigray. The Trade and Industry office also offers loan facilitation through DECSI, the micro-finance institution. These loans are provided at an interest rate that is 3 percent lower than the average private loan. Loans are approved on the basis of submitted project profiles.

ICT incubation centers have also been established to help expand the IT industry in Mekelle. Currently, several dozen companies are given space in a 700 m2 office and given project-based subsidies as well as a two-year grace period on equipment and building usage. These centers are financed through World Bank funds. After the two-year sponsorship, recipients of these funds must help train the center’s next occupants. Tigray is the only region in Ethiopia with ICT incubation centers.

Other approaches adopted by the Bureau of Trade and Industry include cluster development as defined (and funded) by the United Nations Industrial Development Organization (UNIDO). This approach provides for “cooperation within competition” through the use of bulk purchasing of raw materials, and the provision of government contracts without tender for light industry and service-oriented businesses in metal and woodworking. The promotion of SMEs has shown positive results over the last several years, including through the creation of a Business Development Service to advise the SME sector. As of 2007, there were 72,000 SMEs in Tigray, although this number is expected to rise to over 100,000 by 2009.85

4. Tigray Development Association The Tigray Development Association does not work primarily in investment promotion, but does help coordinate an extensive network of Ethiopian Diaspora members. While diaspora members are typically registered as domestic investors, they are able to access foreign capital and serve as an important bridge to foreign communities.86

84 See the TAMPA website for more information at www.agrimartg.org. 85 Interview with Bureau of Trade and Industry Director, (May 28, 2008). 86 See the Tigray Development Association at www.tdaint.org.

68 5. Mekelle Chamber of Commerce Finally, the Mekelle Chamber of Commerce is another conduit for investment promotion. The Chamber receives support from the Friedrich Ebert Foundation, a German development organization. One of the agency’s major objectives is to develop independent and standardized review mechanisms for accessing credit from local banks.

Chapter 5. Conclusion

The Millennium City of Mekelle has much to offer to potential investors – it is expanding rapidly, and has cheap labor, a strong educational system, and a business friendly environment. The Governments of the Regional State of Tigray and Mekelle City are also undertaking a number of important initiatives to overcome current investment constraints.

A number of viable investment opportunities have been identified in Mekelle, particularly in agriculture and agro-processing including livestock and honey, fruits and vegetables, dairy, meat and leather. Further opportunities abound in tourism, cotton and textile production, floriculture, spices, and mining. Mekelle and Tigray have also been helped by government decentralization efforts over the last several years that have placed greater emphasis on export-oriented activities.

In short, although Mekelle is facing many challenges to improve business activity and attract greater investment, it is an attractive place to invest and is poised to grow in the coming years.

Appendix 1: Project proposals available at Tigray Investment Office (The Tigray Investment Office has project profiles and development plans for the following industries available for a nominal fee)

TEXTILES Macaroni, pasta and biscuits Cement waterproofing compounds Calcinated gypsum Children's Clothing Livestock feed Veterinary Medicine Cement tiles Mosquito nets, sports nets and fishing Poultry feed Surgical gloves Disk brake lining nets Processed honey Sodium hypo chlorite Refractory bricks Nylon zip fastener Potato chips Caustic soda Sheet glass Tape for spindles and nylon zip fasteners Mini brewery (beer) Glucose Production Glass bottles and tumblers Canvas-based products Automobile rubber parts Chalk Gauze and Bandage WOOD AND PAPER PRODUCTS Glue production Plaster of Paris Absorbent cotton and sanitary pads Pencil and wooden ruler production Shoe polish Ceramic Sanitarywares Sewing thread Toothpicks, tongue depressors, wooden Polypropylene film bags Cement poles Carpet ladles and Forks Paint brushes (flat) Roof Tiles from clay Acrylic yarn Gummed paper and Stickers Injection moulded plastic education Gemstones Canvas shoes Handmade paper and egg trays materials Ceramic table ware Blankets Aluminum foil Sodium silicate Lint, cotton and Edible oil production Paper tubes and cones Rubber molding METAL AND ELECTRO- Corrugated paper board Non-soap detergent bars MECHANICAL LEATHER Cement paper bags Electrical lights, switches and wall Springs and coils Collection and Preservation of hides and Toilet paper sockets Radiators, fuel tanks and silencers skins Exercise books Plastic buttons Cans for Packing Laminated leather belts Sanitary Napkins Printing ink Aluminum frame and profiles Leather goods Paper Envelopes Urea resin adhesive Saw blades Leather jackets Adhesive tape Hand pumps Leather footwear CHEMICAL, PLASTIC & RUBBER Incenses sticks Pipe fittings and valves Lather board Plastic chairs, tables and stools Insecticides, Herbicides and Fungicides Sliding doors and folding gates Plastic house hold goods Cleaning powder Small automotive parts or accessories FOOD AND BEVERAGES Varnish Chlorine Tubes and pipes Margarine Plastic Gutters, down pipes & conduits Detergent powder Brass hardware Canned fruit Melamine tableware Glycerin, hair oil, shampoo and perfume Simple workshop machines (bench Dehydrated fruits Artificial Leather Surgical adhesive tape grinder, hand drill and electric cutter) Tomato ketchup and sauce Plastic strips Medical syringe Filter element for Vehicles Marmalade production from cactus Hydrogen peroxide Gaskets and ’O' rings Hospital beds, stretchers and wheel Dressed and packed chicken Rubber Stoppers Albums, file covers, file folders and chairs Iodized salt Car batteries wallets Radio set assembly Carbonated beverage / lemonade Red Oxide paint Flash light Torch Sprinklers Mineral licks Masking and cellophane tape Slippers production Snap fasteners and metallic buttons Powdered Milk Automotive paint Rubber Soles and heels Aluminum wares (milk Container, cream Baby food Chrome sulphate Polyurethane foam churners and cookingware) Composite flour Sodium sulphate Combs, hair brushes and hair grips Shock absorbers Corn flakes Thinner Plastic woven sacks Hand and machine sewing needles Vinegar Oral rehydration salts (ORS) Nylon twin rope Mesh wire, gabion wire and light guards Beef in jelly Bees wax production Feeding bottles and nipples Chrome (Electro) plating service Spices Calcium carbide Hypodermic Needles Pasteurized milk, butter, and cheese Distilled water NON-METALLIC MINERAL Farm implements (shovels, spades, and Wine Plastic zippers Mosaic tiles rakes) Purified water PVC floor tiles and coverings Grinding wheels Fencing net, barbed wire & bed springs Baker’s yeast (instant dry yeast) Fertilizer from bone meal Lime Metallic Containers

Low Cost transport vehicles Umbrella Roofing nails Metallic shop accessories and belt fasteners Wood screw and rivets Hinges lock and Padlocks Welding Electrodes Bolt and nuts Steel wires Fluorescent fixtures production Water flow meter production Pilfer proof caps production Staplers, punchers and staple removers Insulated wires and cables Metallic sanitary fittings Concrete mixers, hollow block making machines, oil press machines and bakery ovens Razor blades Solar cookers and solar water heaters Grain dryers, seed cleaners and seed treaters87

87Source: Tigray Industry, Trade and Transport Bureau. For more information, see: www.tigrai.org/development/index.htm

Appendix 2: Guidelines for environmentally sound investments88

General guidelines 1) The proponent is responsible for complying with the requirements of the environmental impact assessment process. 2) The proponent may appoint an independent consultant and/or a multi-disciplinary group of consultants. 3) The proponent is responsible for all associated costs incurred when following the EIA process. 4) The proponent must ensure that adequate participation of the competent agency and any other interested or affected parties has been carried out. 5) When an impact assessment report is completed the proponent shall be responsible for ensuring its approval. 6) Based on environmental impact assessment proclamation number 299/2002 of Ethiopia Article 7 sub-article 1, the proponent shall submit the environmental impact assessment report to regional environmental protection authority. 7) The regional environmental authority decision is expected before implementation and the authority shall give a response to the report.

Environmental impact assessment

Background of the project proposal • Size and nature of development. • Description of project alternatives. • Sources, types, characteristics and volume of raw materials. • Time schedule for phasing of development, i.e., construction, operation, maintenance, decommissioning. • Description of technological processes. • Byproducts, output. • Removal and disposal of waste. • Human and resource material cost.

Environmental baseline informationThis section should provide a detailed assessment of the environment that will be affected by the development. Some of the elements to include are the following: • Area specific information such as land tenure, surrounding land uses, physical constraints, infrastructure services in and around the project. • Boundaries of the project and its impact on the environment. • Qualitative and quantitative biophysical environment data, e.g., climate, soil, geology, hydrology, topography, flora and fauna. • Qualitative and quantitative socio-economic data such as demographic indices, standard of living, infrastructure services, housing, energy and water supply. • Cultural and historic environment description. • Project area maps, figures and others.

88 This section draws on Tigray Investment Office, Tigray Investment Guide, op. cit.

Analysis of the environmental impacts This section will identify, predict and evaluate impact, both negative and positive. With regard to each impact, the following elements should be included: • Criteria used for determining significance of impact, e.g., magnitude, geographic, extent, duration, frequency, reversible or irreversible, risk or uncertainty, size of affected group. • Brief description and analysis of each impact such as nature, significance, and extent. • Description of affected stakeholders in and around the project area. • A comparison of proposal options. • Impact of the project on the current, future or previously affected ecosystem. • Potential accident or hazard scenarios covered in the assessment. • Degree of confidence in prediction.

Description of mitigation measures This section will formulate mitigation measures for each impact and indicate resource allocation to achieve stated measures. Elements to be included: • Preventing, reducing or minimizing impact before they occur. • Eliminating an actual impact over time by incorporating appropriate maintenance measures. • Rectifying an impact by repairing, rehabilitating or restoring the affected ecosystem. • Compensating appropriately for an impact both for human beings and the environment. • Maximizing beneficial impacts through specific additional actions.

Preparing environmental management plan This section should include the following elements: • Description of the proposal for mitigation measures. • Schedule for implementation of mitigation measures. • Cost estimate of mitigating measures. • Capacity building action plan preparations on human and material resources. • Description of stakeholders or parties, who are responsible for implementing mitigation measures.

Monitoring the efficacy of mitigation measures This section should include: • A reporting schedule to the appropriate environmental protection authority. • Methods of monitoring should be described.

Conclusion and recommendation This section will sum up the report and detail the steps necessary to move forward.

Appendix 3: Legal framework for investments89

Federal laws and regulations Name Area Investment laws Proclamation No. 375/2003, A Proclamation to Amend Amended law governing investment Amended Law governing investment the Investment Re- enactment Proclamation No. 280/2002 Proclamation No. 280/2002, Re-enactment of the Law governing investment Investment Proclamation Council of Ministers Regulation (No. 84/2003) on Regulation governing investment incentives and reserved Investment Incentives and Investment Areas Reserved for areas Domestic Investors Trade, taxation, finance, and insurance laws Commercial Code (Proclamation No. 166/1960) Law governing company formation, operation, dissolution, etc. Civil Code (Proclamation No. 165/1960) Law governing various types of contracts Maritime Code (Proclamation No. 164/1960) Proclamation No. 67/1997, Commercial Registration and Law governing business registration and licensing Business Licensing Proclamation Federal Government Commercial Registration and Regulation governing procedures for business registration Licensing Regulation No. 13/1997 and licensing Proclamation No. 123/1995 Concerning Inventions, Law governing the protection of inventions, utility models Minor Inventions and Industrial Designs and industrial designs Council of Ministers Regulation No. 12/1997, Inventions, Regulation governing patents, utility models and Minor Inventions and Industrial Designs Regulation industrial designs Proclamation No. 227/2001, A Proclamation to Amend Law governing tax identification number, tax the Income Tax Proclamation (No.173/1961,as amended) withholding, directives and penalties Proclamation No. 286/2002, Income Tax Proclamation Law governing income tax Proclamation No. 283/2002, Value Added Tax Law governing value-added tax Proclamation Proclamation No. 20/2002, Excise Tax Proclamation Law governing excise duties Proclamation No. 249/2001, A Proclamation to Provide Law governing duty drawback, voucher and bonded for the Establishment of Export Trade Incentive Scheme manufacturing warehouse incentive schemes Proclamation No. 83/1994, Monitory and Banking Law governing the powers & duties of the National Bank Proclamation Proclamation No. 84/1994, Licensing and Supervision of Law governing the licensing and supervision of banks Banking Business Proclamation Proclamation No. 86/1994, Licensing and Supervision of Law governing the licensing and supervision of insurance Insurance Business Proclamation businesses Council of Ministers Regulation (No. 200/1994) on Law governing establishment of Development Bank of Establishment of the Development Bank of Ethiopia Ethiopia Proclamation No.329/2003, Trade Practice Proclamation Law governing unfair trade practices Labor and industry laws Proclamation No. 42/1993, Labor Proclamation Umbrella law governing worker-employer relations, work permits, etc Proclamation No. 52/1993, Mining Laws governing mining Proclamation No. 23/1996 Mining Tax Law governing 35 percent income tax on taxable income Proclamation No. 152/1999, International Labor Law on ratification of ILO conventions Organization Convention Ratification Proclamation Proclamation No.146/1998 Privatization of Public Law governing the processes and modalities of Enterprises Proclamation privatization Proclamation No. 17/1996, Establishment of the Board of Law governing the establishment of the Board and the Trustees for Privatized Public Enterprise scope of its duties and responsibilities Proclamation No. 11/1995, Tourism Commission Law governing the establishment of the Commission and

89 Drawing on UNCTAD, Ethiopian Investment Guide (Geneva: UNCTAD, 2004), http://www.unctad.org/en/docs/iteiia20042_en.pdf, as well as interviews with industry participants.

Establishment Proclamation of its duties and its scope responsibilities Proclamation No. 272/2002, Re-Enactment of Urban Law governing the period of lease as based on the level of Lands Lease Holding urban development, sector, or type of development activity Proclamation No. 86/1997, Electricity Proclamation Law governing the generation, transmission & supply of electricity for commercial purposes Environmental laws Proclamation No. 299/2002, Environmental Impact Law governing environmental impact assessment of Assessment Proclamation investment projects Proclamation No. 9/1995, Environmental Protection Law governing the establishment of the Authority and its Authority Establishment Proclamation powers, duties and responsibilities Proclamation No.120/1998, Establishment of the Institute Law governing the establishment of the Institute and its of Biodiversity Conservation and Research duties and responsibilities Proclamation. No. 300/2002, Environmental Pollution Law governing pollution control measures Control Proclamation Proclamation, No. 295/2002 Environmental Protection Law elaborating the responsibilities of Environmental Organs Establishment Authorities Council of Ministers Regulation (115/2005) on Ethiopian Regulations governing water use. Water Resources Management Regulations

International treaties and membership Signatory, Convention on the Settlement of Investment Disputes Between States and Nationals of Other States dated 18 March 1965 and entered into force on 14 October 1966.

Signatory, Convention establishing the Multilateral Investment Guarantee Agency of 11 October 1985. Entered into force on 12 April 1988.

Observatory status at the World Trade Organization (WTO).

Member, Market for Eastern and Southern Africa (COMESA).

Signatory, Fourth ACP-EEC Convention, signed at Lomé on 15 December 1989, Official Journal L 229, 17/08/1991 p. 0003 – 0280

Partnership Agreement Between the Members of the African, Caribbean and Pacific Group of States of the one Part, and the European Community and its member states, of the Other Part, Signed in Cotonou, Benin on 23 June 2000.

Bilateral investment treaties with Italy (1994), Kuwait (1996), China (1998), Malaysia (1998), Switzerland (1998), Yemen (1999), Sudan (2000), Turkey (2000), Denmark (2001), Algeria (2002) and Netherlands (2003).

Double taxation treaties with United Kingdom (1977) and Algeria (2002).

Regional State of Tigray laws and regulations Investment Proclamation 12/1987 Rural Land Law 23/1989 Registration for business license 7/1991 Rural Land Investment Law 15/1994 Land Use Law 136/2000 Forestry Law 144/2000

Ethiopia is a member of the World Bank Multilateral Investment Guarantee Agency (MIGA), which issues guarantees against non-commercial risks to enterprises which invest in signatory countries. Ethiopia has expressed a strong commitment to concluding bilateral investment promotion and protection treaties with any country and has already signed numerous such agreements. Ethiopia has also signed the World Bank’s International Convention on Settlement of Investment Disputes between States and Nationals of other States (ICSID).

Appendix 4: List of interviews

Abergelle Slaughterhouse General Manager, (June 4, 2008). Abyssinia Flat Products PLC, General Manager, (June 3, 2008). Adwa Shoe Company Owner and Manager, (June 4, 2008). Aider Tomato General Manager, (May 30, 2008). Alaje Forest Development General Manager, (March 26, 2008). Brothers Engineering Owner, (May 23, 2008). Bruh-Tesfa Marketing Director, (March 14, 2008). Dairy and Feed Processing Association Manager, (May 26, 2008). Dejenna Business Development Office Head, (May 5, 2008). Desta Alcohol Factory General Manager, (May 23, 2008). Dimma Honey General Manager, (March 20, 2008). EEPCO Tigray Regional Director, (April 24, 2008). EFFORT Business Development Department Head, (May 4, 2008). Ethiopia Bureau of Capacity Building Director, (May 22, 2008). Ezana Mining General Manager, (February 29, 2008). General Manager of National Geotextile Factory, (April 7, 2008). GTZ Engineering Officer, (March 28, 2008). Horn Travel Agency Owner and Operator, (June 3, 2008). Land O’Lakes Chief Operating Officer, (June 1, 2008). Maa Garment General Manager, (February 28, 2008). Maichew Particle Board General Manager, (March 28, 2008). Mekelle City Urban Planning Department Head, (April 19, 2008). Mekelle City Sanitation Department Head, (March 14, 2008). Mekelle City Water Supply and Sewerage Director, (April 20, 2008). Mekelle Dairy General Manager, (May 24, 2008). Mekelle Gemstone owner, (May 25, 2008). Mekelle Water Supply Director, (April 20, 2008). Messebo Cement General Manager, (April 3, 2008). Milano Hotel Manager, (May 22, 2008). Millennium Villages Project (MVP) Business Development Coordinator, (May 28,2008). PGE Aluminum, Paulos, and Selam Steel Owner, (June 1, 2008). Road and Construction Department Head, (March 14, 2008). Sheba Tannery Chief Financial Officer, (February 21, 2008). TAMPA Director, (April 3, 2008). TAMPA Agriculture Specialist, (April 14, 2008). Tigray Bureau of Rural Development and Agriculture, Natural Resources Department Head, (May 30, 2008). Tigray Bureau of Trade and Industry Director, (May 28, 2008). Tigray Bureau of Rural Development and Agriculture, (May 30, 2008). Tigray Investment Office Department Head, (April 24, 2008 and March 16, 2008). Yegaw PLC General Manager, (May 24, 2008).

References

Agonafir, Johannes, “Market and marketing of products within the selected value chains,” (Addis Ababa: BOAM–SNV, 2005).

Agonafir, Johannes, “Strategic intervention plan on selected four value chains and two reserve chains,” (Addis Ababa: BOAM–SNV, 2005).

Business Organization and Access to their Markets (BOAM), Milk and Milk Products Value Chain Coordination Group Meeting (Addis Ababa: BOAM–SNV, 2006).

Central Statistical Agency (CSA) of Ethiopia, http://www.csa.gov.et/ (last visited November 2009).

Elfring, Wilhem, Yohannes Agonafir, and Mulugeta Tefera, “Value chains identification for intervention study on value chains,” (Addis Ababa: BOAM–SNV, 2005).

Ethiopian Investment Agency (EIA), http://www.ethiomarket.com/eic/ (last visited November 2009).

Food and Agricultural Organization (FAO), Agricultural Production and Diversification Program Food and Cash Crops (Rome: FAO, 2005).

Gebrehiwot, Kindeya, et. al., “A key dryland tropical species in northern Ethiopia,” (Göttingen, Germany: University of Göttingen, 2002).

Globalis, Ethiopia: GDP per capita annual growth rate, http://www.globalis.gvu.unu.edu/indicator_detail.cfm?IndicatorID=45&Country=ET.

Government of the City of Mekelle, Urban Scope of Study: Mekelle Finance Planning and Management (Mekelle: Mekelle City Plan Preparation Project Office, 2006).

Government of the City of Mekelle, Urban-Urban and Urban-Rural Linkage Studies (Mekelle: Mekelle City Plan Preparation Project Office, 2006).

Government of Ethiopia, Agricultural Sample Survey 2007/08(2000 E.C) (Addis Ababa: Central Statistical Agency, 2008).

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Government of Ethiopia, Census 2007 (Addis Ababa: Central Statistical Agency, 2008).

Government of Ethiopia, Ethiopian Customs Authority, http://www.telecom.net.et/~ethcusau (last visited November 2009).

Government of the Regional State of Tigray, Policy Framework for Regional Development and Economic Growth Corridor (Addis Ababa: Tigray Ministry of Agriculture and Rural Development and UNDP, 2007).

Government of the United States, Doing Business in Ethiopia: A Country Commercial Guide for US Companies (Washington, DC: US Commercial Service, 2007).

Government of the United States of America, Ethiopian Investment Climate (Washington, DC: US Department of State, 2008), http://www.state.gov/e/eeb/ifd/2008/100861.htm.

International Organization for Standardization, http://www.iso.org/ (last visited November 2009).

Lemma, Teigist, “Case study on Ethiopia” (Geneva: UNCTAD, 2006), mimeo.

Midroc Ethiopia Technology Group, http://www.midroc-ethiotechgroup.com/ (last visited November 2009).

Millennium Cities Initiative (MCI), The Earth Institute at Columbia University, http://www.earth.columbia.edu/mci (last visited November 2009).

Millennium Villages Project (MVP), Business Plan for Ecotourism (Hawzen, Ethiopia: Millennium Villages Project, 2008).

Millennium Villages Project (MVP), Business Plan for Honey and Honey By-Products (Hawzen, Ethiopia: Millennium Villages Project, 2008).

National Bank of Ethiopia (NBE), http://www.nbe.gov.et/ (last visited November 2009).

Reliefweb, http://www.reliefweb.int/rw/fullMaps_Af.nsf/0/E85F2E6F11D6AB1785256E7D0058CFE3/$Fil e/cia_eth210404.jpg?OpenElement (last visited on November 2009).

Sheba Tannery, http://www.telecom.net.et/~shebatan (last visited November 2009).

Tigray Agriculture and Marketing Promotion Agency (TAMPA), http://www.agrimartg.org (last visited November 2009).

Tigray Agriculture and Marketing Promotion Agency (TAMPA), Annual Report (Mekelle: TAMPA, 2007).

Tigray Agriculture and Marketing Promotion Agency (TAMPA), Honey Situation Analysis (Mekelle: TAMPA, 2008).

Tigray Bureau of Industry, Trade and Transport, http://www.tigrai.org/development/index.htm (last visited November 2009).

Tigray Development Association, http://www.tdaint.org (last visited November 2009).

Tigray Investment Office, Tigray Investment Guide (Tigray, Ethiopia: Tigray Investment Office, 2008).

United Nations Conference on Trade and Development (UNCTAD), Ethiopia Country Fact Sheet (Geneva: UNCTAD, 2008).

United Nations Conference on Trade and Development (UNCTAD), Ethiopian Investment Guide (Geneva: UNCTAD, 2004), http://www.unctad.org/en/docs/iteiia20042_en.pdf.

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MCI AND VCC WORKING PAPER SERIES ON INVESTMENT IN THE MILLENNIUM CITIES No 09/2009

BAMBOO BICYCLES IN KISUMU, KENYA

Katherine Athanasiades Michelle Eames Riham Hussein Young Rhee

December 2009

432 Park Avenue South, 13th Floor, New York, NY10016, United States Phone: +1-646-884-7422; Fax: +1-212-548-5720 Websites: www.earth.columbia.edu/mci; www.vcc.columbia.edu

MCI and VCC Working Paper Series

N. 09/2009

The Millennium Cities Initiative (MCI) is a project of The Earth Institute at Columbia University, directed by Pro- fessor Jeffrey D. Sachs. It was established in early 2006 to help sub-Saharan African cities achieve the Millennium Development Goals (MDGs).

As part of this effort, MCI helps the Cities to create employment, stimulate enterprise development and foster economic growth, especially by stimulating domestic and foreign investment, to eradicate extreme poverty – the first and most fundamental MDG. This effort rests on three pillars: (i) the preparation of various materials to inform foreign investors about the regulatory framework for investment and commercially viable investment opportunities; (ii) the dissemination of the various materials to potential investors, such as through investors’ missions and roundtables, and Millennium Cities Investors’ Guides; and (iii) capacity building in the Cities to attract and work with investors.

Correspondence should be directed at any of the editors.

A separate MCI working papers series on the social sector is also available.

For more information, please refer to the MCI website at: http://www.earth.columbia.edu/mci/ and the Vale Co- lumbia Center website at: http://www.vcc.columbia.edu/.

Copyright © 2009 by the Millennium Cities Initiative (MCI) and Vale Columbia Center on Sustainable Interna- tional Investment. All rights reserved. Unless otherwise indicated, this working paper may be reproduced, quoted or cited without permission of the author(s) provided there is proper acknowledgement. The responsibility for the contents of this Working Paper remains with the author(s). Accordingly, this publication is for informational purposes only and is meant to be purely educational. While our objective is to provide useful, general information, the Millennium Cities Initiative and the Vale Columbia Center make no representations or assurances as to the accuracy, completeness, or timeliness of the information. The information is provided without warranty of any kind, express or implied. This publication does not constitute an offer, solicitation, or recommendation for the sale or purchase of any security, product, or service. Information, opinions and views contained in this publication should not be treated as investment, tax or legal advice. Before making any decision or taking any action, you should consult a professional advisor who has been informed of all facts relevant to your particular circumstances. Table of contents

List of acronyms...... 5 Acknowledgments...... 5 1. Project overview...... 6 1.1. Background and objectives...... 6 1.2. Methodology...... 6 1.3. Key findings...... 6 1.4. The Client—MCI...... 7 1.5. Kenya...... 7 1.6. Kisumu...... 8 1.7. Economy...... 8 1.8. Environmental factors...... 9 1.9. Investment environment in Kenya…...... 9 1.10. Bamboo bicycles...... 10 1.11. Bamboo...... 10

2. Market opportunity...... 12 2.1. Current methods of transportation...... 12 2.2. New and used bicycle market...... 12 2.3. Potential markets...... 13

3. Current rural bicycle market...... 16 3.1. Current rural bicycle market size…...... 16 3.2. Addressable market...... 16 3.3. Market penetration rate and gap…...... 18

4. Operational considerations...... 19 4.1. Key findings...... 19 4.2. Bamboo bicycle assembly…...... 19 4.3. Cost of the venture...... 20

5. Financial case study...... 23 5.1. Key assumptions...... 23 5.2. Break-even analysis...... 24 5.3. Demand sensitivity analysis...... 25

Page 3

Table of contents

6. Implementation and risks...... 28 6.1. Demand...... 28 6.2. Imported supplies...... 28 6.3. Bamboo...... 28 6.4. Labor...... 29 6.5. Factory...... 29 6.6. Development impact...... 30

7. Conclusion and next steps...... 31 7.1. Conclusion...... 31 7.2. Next steps...... 31

Appendix 1. Boda Boda market...... 32 Appendix 2. Calculation of current market size...... 33 Appendix 3. Potential rural market size...... 36 Appendix 4. Average household information...... 38 Appendix 5. Operational considerations...... 39 Appendix 6. Equipment costs...... 42 Appendix 7. Training costs...... 43 Appendix 8. Demand sensitivity...... 44

References...... 45

Page 4 List of Acronyms and Acknowledgments

List of Acronyms

ABC Africa Bamboo Center DFID Department for International Development FAO Food and Agriculture Organization GDP Gross domestic product IMF International Monetary Fund INBAR International Network for Bamboo and Rattan IRR Internal rate of return KARI Kenya Agricultural Research Institute KEFRI Kenya Forest Research Institute KEBS Kenya Bureau of Standards KES Kenyan shillings LBDA Lake Basin Development Authority MCI Millennium Cities Initiative MDGs Millennium Development Goals MVP Millennium Villages Project NEMA National Environmental Management Authority NGOs Non-governmental organizations NPV Net present value PPP Purchasing power parity SIPA School of International and Public Affairs UNIDO United Nations Industrial Development Organization VAT Value added tax WB World Bank WDI World Development Indicators

Acknowledgments

The authors would like to express their gratitude to the many individuals who shared their time, resources and enthusiasm with them in the completion of this working paper. At Columbia, the authors in particular would like to thank Millennium Cities Initiative (MCI) Co-Director Dr. Karl P. Sauvant, Senior Investment Advisor Joerg Simon, SIPA Professor Jenny McGill, Professor John Mutter, Professor Gita Johar and Marty Odlin for their guidance and support. The authors would also like to recognize the contributions of Paulo Cunha and Zach Arney throughout the editing process and the publication of the document. In Kenya, the authors are particularly grateful to Laban Mburu and Ben Obera, who were invaluable assisting with research and interviews for this report. Fi- nally, the authors would like to recognize and thank all the entrepreneurs and representatives of organizations who helped facilitate the research and generously agreed to be interviewed for this study.

Page 5 1. Project overview

1.1. Background and objectives

This study was undertaken by Columbia University’s School of International and Public Affairs (SIPA) with support from the Millennium Cities Initiative (MCI) at The Earth Institute. The MCI was launched in 2006 to assist selected mid‐sized cities across sub-Saharan Africa in their efforts to achieve the Millennium Development Goals (MDGs).

This study assesses the feasibility of initiating a bamboo bicycle production facility in the Millennium City of Kisumu, Kenya, drawing on a previous study analyzing a similar venture in Kumasi, Ghana, another of the Millen- nium Cities.

Figure 1. Project goals

 Size the current transportation market in terms of existing bicycles as well as all other forms of transportation.  Assess the potential market size.

 Identify and assess the needs of the potential consumers.  Quantify the production facility and operational costs. GOALS GOALS  Estimate the financial returns. Sources: SIPA and MCI.

1.2. Methodology

To ascertain the feasibility of establishing a bamboo bicycle project in Kisumu, from November 2008 – April 2009, a team from the School of International and Public Affairs (SIPA) at Columbia University conducted desk-based research and surveys, individual interviews and focus groups with industry and market participants, government officials, environmental specialists, academics, and businesspeople. The team also made two field research trips to Kisumu in January and March 2009.

During the course of the study, certain assumptions were made to determine the size of the market, estimate the operational costs, and assess the financial returns of this business opportunity. All of the analyses and findings in this report are based on primary and secondary data and information gathered from interviews. A survey was also administered in Kenya. Key assumptions and risks as well as alternative financial and operational scenarios that may be pursued by investors are outlined. All of our currency conversions are made using Oanda (http://www.oanda.com) rates from March 2009.

1.3. Key findings

1.3.1. Market opportunity

Market research was conducted for various segments of the population including rural and urban commuters. Presently, many people walk or use whatever informal public transportation is available in Kisumu. Bicycles are a mode of low cost transportation that can be used by rural commuters, students, and even non-government organizations to deliver services. However, bicycles in Kisumu are poor in quality and must be repaired frequently. This study suggests that bamboo bicycles will be more affordable and of a higher quality than the bicycles currently available on the market.

One can estimate that the annual bicycle market size is approximately US$12 million, with a total potential market size of US$51 million. The total potential unpenetrated market is approximately US$39 million.

1.3.2. Pricing

Based on the production of 30,000 bamboo bicycles per year, one can estimate that the cost of producing one bamboo bicycle will be approximately US$35, the wholesale price will be US$37 and the expected retail price will be US$49.

Page 6 1. Project overview

1.3.3. Financial statement

Based on the output of the planned production facility, the five-year net present value (NPV) of establishing a production facility is approximately US$86,817. The payback period, or break-even point, occurs in less than two years from the beginning of operations. This scenario sees an internal rate of return (IRR) of 65% (See Financial case study in section 5 for explanation).

1.3.4. Development impact

Launching a bamboo bicycles initiative would have numerous economic benefits for the Kisumu region, particularly with respect to job creation among the youth. Because the project aims to source the bamboo locally, the potential also exists to stimulate the nascent bamboo industry, thereby helping raise the average income level of farmers in many rural areas. Environmental benefits could take place in both the early and late points of production: growing bamboo helps prevent soil erosion, purifies water and air and generates little waste, while production does not use harmful chemicals. Finally, there are positive social ex- ternalities. For instance, with bamboo bikes, community health workers and parents would gain access to a more durable and affordable means of transporting the sick to clinics and students to schools.

1.4. The Client—MCI

As an urban counterpart to the Millennium Villages Project (MVP), the Millennium Cities Initiative (MCI) assists eleven sub- Saharan African cities to attract investment, reduce poverty and achieve economic growth. In addition, the MCI helps generate needs assessments in the social sectors, in order to develop city development strategies to achieve the MDGs (MCI 2009). Be- cause of its close proximity to the Millennium Village in nearby Sauri, Kisumu was selected as the first Millennium City in 2006 (MCI 2007).

1.5. Kenya

Kenya is a coastal East African country with border access to Lake Victoria. The largest cities are Nairobi, the capital; Mom- basa, a port city; and Kisumu, located on Lake Victoria. Map 1. Locating Kisumu Kenya has experienced a decline in per capita income and an increase in income disparity over the last several decades. Estimates from 2006 assert that the wealthiest ten percent of the population account for approximately 40 percent of total income, while the poorest ten percent of the population account for only one to two percent of total income (Library of Con- gress 2008). As of 2005, approximately 40 percent of Kenyans lived on two Sources: SIPA and MCI. dollars per day or less (World Bank Group 2009b). Fortunately, many of the country’s development indicators have been improving in recent years: more children are in school, and health and water and sanitation indicators have improved (Department for International Devel- opment 2008).

Page 7 1. Project overview

1.6. Kisumu

Kisumu is located on the eastern arm of Lake Victoria in the Nyanza Province. The city has suffered in recent times due to aging infrastructure and poor governance (MCI 2007, p. 3). Environmental degradation and over-fishing are also putting crucial natural resources at risk (MCI 2007, p. 18). Over the years, Kisumu’s once efficient road and railway networks have deterio- rated and the inability to transport goods efficiently has inflated transportation costs (MCI 2007, pp. 35-36). Additionally, Ki- sumu was greatly impacted in Kenya’s post-election instability in 2007 and 2008 (Gettleman 2008).

Table 1. Kenya and Kisumu in brief

Kenya Kisumu

Capital: Nairobi Population: 535,664 Form of Government: Republic Population of youth (15 – 25): 128,367 Exchange rate (March 2009): Life expectancy: 49 years US$ 1 = 82 KES (Kenyan shillings) Labor in brief: Population: 37.5 million Median age: 18.6 years Employment in agriculture—75% GDP (PPP): US$58.8 billion Wage employment— 10% GDP per capita (PPP): US$1,699 Rural self-employed—3% Unemployment rate: 15% (official 2005 Urban self-employed—4% Total number of unemployed, Kisumu figure), 40% (unofficial estimate) District — 104,657

Sources: Library of Congress 2008, International Monetary Fund 2009, and Office of the Vice-President 2008.

1.7. Economy

Kenya’s GDP (PPP) in 2008 was US$58.8 billion (calculated in international dollars at the purchasing power parity). In 2007, the economy grew at 7.0 percent and inflation by 9.8 percent (World Bank Group 2009b). Current GDP per capita is US$1,699.24. Kenya’s economy is heavily reliant on the service industry, which accounts for 58.2 percent of GDP. Agriculture and industry, including manufacturing, support the rest of the economy. Although agriculture only accounts for 22.7 percent of GDP, it employs nearly 75 percent of the country’s population (Library of Congress 2008). The main agricultural products are coffee, tea, sugarcane, maize, sisal, cotton, tobacco and dairy (Foreign and Commonwealth Office 2008).

Despite the distinct challenges of Kenya’s economy, if GDP per capita continues to grow as projected over the next few years, this should translate into increased purchasing power for the average Kenyan, allowing more people to move above the poverty line and making the bicycle as a form of transportation even more affordable.

Page 8 1. Project overview

Figure 2. Kenya GDP (PPP), 2007 Figure 3. Projected GDP per capita (PPP)

Services 58.2%

Agriculture 22.7%

Industry 7.2%

Manufacturing 11.8%

Source: Library of Congress 2008. Source: World Bank Group 2009b.

1.8. Environmental factors

The potential production of bamboo for transportation purposes could have a direct and important impact on the natural environment of the country. Today, Kenya faces a number of environmental challenges, including soil erosion, desertification, deforestation and insufficient and poor quality water. The amount of forested land declined by 50 percent over the last three decades to only three percent of Kenya’s total land area (Library of Congress 2008). The loss of forest also aggravates soil erosion. In addition, it can create serious challenges for many rural families and especially women, who can spend hours daily in search of firewood and water (Library of Congress 2008).

1.9. Investment environment in Kenya

The World Bank’s (WB) 2010 Doing Business Report, which provides quantitative assessments of global business regulations and government enforcement, ranks Kenya 95th out of 183 countries in terms of Ease of Doing Business. Despite dropping several places in 2010, Kenya has made strides over the last few years to simplify the business climate for investors. For instance, from 2008 to 2009, the country’s ranking for Ease of Starting a Business improved from 115 to 109 mainly due to a decrease in the number of procedures and length of time required to start a business. Currently, setting up a new business requires 12 procedures over a 34-day period and funding equivalent to 36.5 percent of income per capita (see table 2). Notably, Kenya is ranked 4th globally in terms of getting credit (World Bank Group 2009a, p. 3).

Figure 4. Ease of doing business, global rank (selected countries)

176 182 200 131 150 112 95 100 67 50 1 0

Source: World Bank Group 2009a. Page 9 1. Project overview

Table 2. Ease of starting a business, Kenya rankings 2008-2010

Ease of starting a 2008 2009 2010

Rank 115 109 124 Procedures 12 12 12 Duration (days) 44 30 34 Cost (percent of income/ 46.1 39.7 36.5 capita)

Source: World Bank Group 2007, 2008, 2009a.

1.10. Bamboo bicycles

1.10.1. History

Bamboo’s strength and versatility make it a very useful material. It has been used by many cultures for products ranging from cups to scaffolding. At the same time, the accessibility, ease of use and relative affordability of bicycles have made them nearly ubiquitous worldwide, providing an effective means of transport for all people, from the rich to the poor. Because of bamboo’s strength and flexibility, it would be a logical material to use on bikes. Additionally, its availability in Kenya makes it an affordable alternative to more expensive imported metal parts.

1.10.2. Research and development

Engineers collaborating with The Earth Institute at Columbia University helped design a bamboo bicycle model that was introduced to Kisumu in March 2009. This prototype is currently being showcased in Kisumu and feedback from businesspeople and various stakeholders in the various market segments is being incorporated into future versions of the bamboo bicycle design. The research is focused on improving the aesthetics and strength of the bicycle, along with the suitability of the local species of bamboo to local road conditions and overall bicycle usage in Kisumu.

Some of the research is also addressing possible alternatives to imported manufactured components by using a greater number of local supplies and alternative components to make future models of the bamboo bicycle even more affordable and “green” than the current model. For instance, Kisumu has a vibrant Jua Kali industry that manages much of the metalworking and welding needs of current bicycle owners. Jua Kali workers create the iron fork supports and other custom pieces used on bicycles and weld metal frames when they break. As a result, one option is to utilize the Jua Kali workers to create some of the metal components needed for bamboo bicycles, thereby further reducing shipping costs.

1.11. Bamboo

Studies by Maseno University’s Tobacco-to-Bamboo project and by the United Nations Industrial Development Organization (UNIDO) have established the economic advantages bamboo provides farmers. Bamboo also has positive environmental benefits and is extremely versatile. In addition, both the Kisumu branch of the Kenya Forest Research Institute (KEFRI) and the Kisumu-based Africa Bamboo Centre (ABC) run workshops devoted to studying the utility and adaptability of bamboo. In addition to these studies, the Kenya Agricultural Research Institute (KARI) oversees bamboo farms from which many of ABC’s bamboo training programs are supplied, and conducts strength testing to establish the feasibility of bamboo for different uses. Research is still ongoing to determine which kinds of bamboo currently available in Kenya are most suitable for bamboo bicycle use.

Bamboo has many qualities that make it suitable for bicycles. In fact, it can carry a load greater than steel at 28,000 Newtons

Page 10 1. Project overview

per square inch compared to 23,000 Newtons per square inch (KPMG 2008, p. 7). Simultaneously, it exhibits greater flexibility, which translates into a vibration-dampening property when used on bicycle frames (Industry participant interview 2009). This translates into a bicycle that can carry a larger load for a smoother ride than traditional metal bicycles.

1.11.1. History of ban

In 1986, the Government of Kenya issued a Presidential ban on harvesting bamboo for commercial purposes. The ban was instituted for environmental reasons: bamboo was being overharvested and faced local extinction. In addition, it primarily grew in water catchment areas, thereby threatening environmental damage if eradicated (Bamboo industry expert interview 2009; Food and Agriculture Organization 2006, p. 9).

Bamboo has since thrived and now grows in clusters in and around Kisumu as well as on the land surrounding Mount Kenya. Bamboo advocacy groups are pushing for the environmentally responsible development of bamboo and the Government is currently reviewing the ban policy (Bamboo industry expert interview 2009).

Although the ban is still in place, farmers can obtain a permit to grow bamboo. The permit is free and there is no restrictive quota on the number of permits that can be distributed per year (KEFRI informant interview 2009).

Stimulation

Due to the harvesting ban, bamboo use has not yet been fully explored by local handicraft workers. It is just now starting to gain awareness as a highly functional and versatile crop, with potential to improve livelihoods. To this end, programs at KEFRI, ABC and Maseno University are helping to train would-be bamboo traders to use and market bamboo products. In fact, Maseno University’s Tobacco-to-Bamboo program is now encouraging tobacco farmers to switch to growing bamboo (Bamboo industry expert interview 2009).

1.11.2. Competitive advantage

The bamboo bicycles’ design has a major advantage over that of current metal bicycles: the bamboo bikes are designed for road conditions particular to the Kisumu region, as opposed to the imported metal bicycles, which are designed mainly for leisurely riding on paved roads (Industry participant interview 2009). Additionally, the frames are built as one piece (including the carrier), rather than as a number of pieces, making them both stronger and more viable economically to consumers of bicycles who no longer have to pay for assembly and extra parts.

In short, using local materials is advantageous in at least two ways. First, bamboo bikes are not only more cost effective than metal bikes (since there is no need to import bike frame parts), but they are also a positive investment in the local economy, helping to improve livelihoods and create jobs.

Page 11 2. Market opportunity

2.1. Current methods of transportation

In Kisumu, people use both motorized and non-motorized forms of transportation.

2.1.1. Motorized transportation

A personal automobile is too expensive for most Kenyans to afford and even more so for residents of Kisumu: the city is one of the poorest in Kenya (Republic of Kenya 2002). Minibuses also known as matatus are the main means of motorized transportation for most people. There are approximately 25,000 matatus in Kenya (Market participants survey 2009). However, they tend to be a dangerous means of transportation due to their lack of safety features. In most cases, they are over-packed with people, and lack basic safety features such as seat belts. However, they are also the cheapest form of transportation at 20 Kenyan shillings (KES) (US$0.24) per ride from Kisumu District’s rural areas to Kisumu city center (Market participants survey 2009).

In addition to matutus, in Kisumu and its surrounding areas, people also hire motorized rickshaws called tuk tuks and motorcycle taxis called piki pikis to get around. Although both methods of transportation offer speed and the tuk tuks offer more cargo space, they tend to be more expensive than matutus.

2.1.2. Non-motorized transportation

There are three basic forms of non-motorized travel: by foot, by bike and in some cases, animal transport. The most popular form of transportation is traveling by foot. However, bicycles are also very popular. A person can own or rent a bicycle or hire a bicycle taxi called a boda boda to get around. Finally, animal transport is also used to carry heavy cargo, mainly in rural areas and farms.

Figure 5. Current transport market, Kenya

High Low

Ease of Mobility Mobility of Ease

Estimated cost per average trip

Source: Market participants survey 2009.

2.2. New and used bicycle market

2.2.1. Supplies

Bicycles in Kenya are imported mainly from China and India. The most sought-after brand from China, called the Phoenix, is often on the pricier end and tends to be flashier in design but a bit more durable than most bikes. However, this brand is too expensive for the average rider to purchase. The most common bike is the Raja from India, which is lower in quality. Second- hand bicycles imported from Dubai are also increasing in number.

In 1998, a total of 140,000 bicycles were imported to Kenya; this number swelled to 240,000 by 2007 (Office of the Vice- President 2008, p. 183), in part due to the removal of the bicycle import tax in 2002 (International Forum for Rural Transport and Development 2008, p. 2). Many bicycles are also traded on the local secondhand market, meaning that some bicycle frames are decades old.

Page 12 2. Market opportunity

2.2.2. Disadvantages

Most imported metal bicycles are cheap, but also heavy and uncomfortable. On average, imported bikes weigh around 22 kg (49 lbs) (Market participants survey 2009). Many boda boda operators need their bicycles to carry large loads, and they often modify the bikes. Their frames tend to warp due to the weight placed on them, creating distortions in handlebars and wheel alignment. This is concerning as boda boda operators ride with passengers all day. For those operators that carry large cargo or travel long distances, the combined weight of the bicycle and cargo can cause discomfort and injury. Numerous boda boda operators have complained of health problems due to fatigue from the sun, road dust, long hours, and heavy cargo (Market participant interview 2009).

The imported bicycles currently on the market are priced between 4,600 KES - 8,500 KES, or approximately US$56 - US$104 (Industry participant interview 2009). To accommodate the Kenyan topography and types of common cargo carried, many bicycles, especially boda bodas as mentioned above, need to be reinforced for strength and durability. These modifications on average add an extra 960 KES, or US$12, to the price of the bicycle (Market participants survey 2009). In addition to these modifications, bicycles often also undergo weekly repairs due to wear and tear.

2.3. Potential markets

A bamboo bicycle has many advantages for a potential customer in Kenya - they can be used for personal or cargo transportation, as well as for commercial purposes.

A number of different market segments can be targeted by a bamboo bicycle initiative. The main segments are boda boda owners and operators, rural commuters, students and universities, local non-government organizations and government agencies.

Because of their multi-functionality, all bamboo bicycles should have a cargo aspect to them.

2.3.1. Boda Bodas

Market segment description

Boda boda operators in Kisumu have about ten customers daily and work on average ten hours. They earn an average daily income of 250 KES (approximately US$3), with most operators earning between 50 KES - 450 KES (US$0.60 - US$5.50) (Market participants survey 2009). The majority of boda boda operators are poor males, aged 16 to 45. In Kisumu, there are approximately 10,000 operators (Boda Boda Association interview 2009). Most operators own their bicycles, which are either inherited or purchased using savings (Market participant interview 2009). Only a few individuals take out loans to purchase bicycles.

The market may be oversaturated due to the explosion in recent years of the boda boda industry. Most boda boda stands often have several operators idling with no customers. Occasionally, successful boda boda operators are able to move upward to motorcycle and tuk tuk operations.

Transportation usage

Boda boda operators use their bicycles all day, six to seven days a week. In parts of Kisumu, the roads are adequately paved, but the outskirts and slum areas generally have poor road conditions. Additionally, the lack of bicycle lanes means that boda boda operators often have to swerve off-road to avoid passing cars and trucks. This causes a lot of wear and tear on the bicycles, especially as they carry an average of 172 lbs - 441 lbs daily (Market participants survey 2009).

Market opportunity

Bicycle quality, comfort, stability and appearance are important attributes in a bike, but operators are most sensitive to bike price (Market participant survey 2009). According to respondents interviewed, an ideal bikes weighs less, is more durable, and carries a larger cargo rack than an average bike.

Due to a lack of resources, most people choose to buy cheap bicycles, while paying a large amount of money over a long period

Page 13 2. Market opportunity

of time for modifications and maintenance. Without having knowledge of the benefits of a bamboo bicycle, approximately half of the survey respondents said that they would pay 3,000 KES (US$37) for a bamboo bicycle, or approximately 1,500 KES (US$18) less than what they would pay for the cheapest quality bikes available (Market participant interview 2009). Upon see- ing a bamboo bicycle, many boda boda drivers offered immediately to pay more money than they would typically pay for an imported model (Market participants survey 2009). An affordable, higher quality bicycle would encourage boda boda operators to replace their current bicycles once they wear out.

2.3.2. Rural commuters

Market segment description

The rural population (i.e. residents living outside of Kisumu city center) comprises approximately 62 percent of the total population of Nyanza Province, home to many of Kenya’s poorest citizens. Approximately 47 percent of Nyanza’s population works in trade or services, while 42 percent works in agriculture. However, agriculture makes up 75 percent of rural household income. To provide some understanding of the needs of the community, only 11 percent of rural households have access to water through a piped system, whereas 31 percent have access to potable water. On average, the distance from a home to a potable water source is 4 km whereas the average distance to a healthcare facility is 8 km (Republic of Kenya 2002, p. 2-28).

Transportation usage

Many rural residents in Nyanza province commute to Kisumu for jobs, food and higher education needs. These people walk or use matutus as a means of transportation. Small food vendors and craftspeople bring their goods to markets using boda bodas, tuk tuks and matatus. Local crafters store their items in a city storage room. When a new shipment of goods arrives, they use carts and other modes of transportation to carry them to their market stalls (Market participant interview 2009).

In rural areas, many women and children gather food and water from long distances, walking an average of four to five km daily (Industry participant interview 2009). Additionally, since they have limited access to health services, they often pay for transportation.

Market opportunity

Clearly, bicycles benefit the rural market in many ways. An affordable bicycle can make jobs that were previously inaccessible due to distance more accessible. Merchants can carry goods on a bamboo bicycle rack to market, improving efficiency and productivity. Additionally, a bicycle can help a family access food, water and healthcare services that were previously inaccessible, and provide income opportunities.

2.3.3. Students

Market segment description

The enrollment rate in primary school-aged children is quite high but drops drastically when children reach secondary school age (see table 3). The one major university in Nyanza, Maseno University, has a total enrollment of 5,686 students.

Transportation usage

Students typically either walk or take transportation to attend school. Maseno University has two campuses, one at Maseno, just outside Kisumu city within Kisumu District, and one in Kisumu city center. Many students commute to and in between these two campuses.

Page 14 2. Market opportunity

Table 3. Enrollment rates, Nyanza province

Nyanza Province Primary students Secondary students

Population 900,489 405,408 Enrollment rate 80% 27%

Source: Republic of Kenya, 2002. Market Opportunity

Bicycles make schools more accessible for many students, particularly those in secondary schools. With the abolishment of secondary school fees for public schools in Kenya, there could be an increase in secondary school enrollment if bamboo bikes were made available to this segment (Evans and Miguel 2007, p. 3). University students also commute to school, particularly after work if they attend part-time. One Kenyan university representative expressed interest in a school bike share-style program to rent out bicycles to students who commute long distances (Market participant interview 2009).

2.3.4. Non-government organizations

Market description

Because it is in one of the poorest regions of Kenya, there are many non-government organizations (NGOs) operating in Ki- sumu. A number of these NGOs are working with community health workers to deliver assistance to poor rural areas. The majority of community health workers are female (Market participant interview 2009).With a shortage of healthcare professionals, these aid workers are trained to provide basic health services as well as food and water to three to four patients per day.

There are also many NGOs helping farmers improve their farming methods, increase profits by selling in bulk, and acquire better farming tools. One NGO, for instance, expressed interest in acquiring bicycles to help officers deliver services and assist farmers in recording yields.

Transportation usage

Community health workers walk an average of four hours daily and provide healthcare services to about four patients per day (Industry participant interview 2009). When necessary, they hire boda bodas or other means of transportation to bring patients to the hospitals in the city center.

Non-government organizations working with farmers also hire boda bodas to visit rural farmers on a daily basis. The sprawling distances they travel require a more effective means of transportation.

Market opportunity

Many healthcare providers would benefit from having a bamboo bicycle to deliver medicine, food and water to patients and to transport the sick to hospitals and clinics when necessary. When easy road transportation is not available, a bamboo bicycle can serve as a cheap and convenient ambulance. A bicycle can be used by either a health services worker or by families that visit hospitals often. With a bicycle, a community health worker can visit more patients and deliver more care, especially in urgent situations. Most healthcare workers currently cannot afford a bicycle and would not have access to a bicycle mechanic for repairs. A bamboo bike would not only be cost friendly, but also provide a light, strong means of transport to help carry heavy loads.

The only caveat is that since most community health workers are female, there is some cultural stigma attached to women driving their own bicycles. However, many younger females typically know how to ride a bicycle (Market interview participant 2009).

Page 15 3. Current rural bicycle market

3.1. Current rural bicycle market size

The current bicycle market includes all of Kenya and consists of urban and rural markets. The urban market is comprised of boda boda bicycles (see appendix 1), whereas the rural market includes both boda bodas as well as regular commuters and NGOs.

The current rural bicycle market size in Kenya is approximately 237,222 annually. Due to differences in the imported bicycle data received from the Ministry of Trade and Industry’s Customs and Excise Department (Office of the Vice-President 2008), the current bicycle market was calculated in four different ways (see appendix 2). The average of all four methods was also calculated. The number of current bicycles in the market is approximately 667,188. Because 60 to 65 percent of Kenya’s population is rural (and more bicycles go to this market), it was assumed that 80 percent of the bicycles bought went to the rural market. In appendix 3, the replacement rate of the bicycles was calculated at 2.25 years (Office of the Vice-President 2008). This resulted in the current market size of 237,222 bicycles. Based on a retail price of approximately US$50 (see figure 6), the total estimated current rural bicycle market size is US$12 million.

Figure 6. Current rural market size, Kenya

Current bicy- Percent of bicy- Estimated Estimated bicycles in market: cle sales attrib- replacement cles sold each 667,188 x uted to rural ÷ rate: 2.25 = year to rural market: 80% years market: 237,222

Estimated bicycles Average price per Estimated rural sold each year to ru- bicycle to rural bicycle market size: x = ral market: 237,222 market: US$50 US$12 million

Sources: SIPA and MCI.

3.2. Addressable market

The primary market is the rural one. The rural market includes regular commuters as well as non-governmental organizations and rural boda boda operators.

The annual rural market size for bamboo bicycles in Kenya is approximately 1,011,000 bicycles. The following methodology was used to arrive at this number: First, the total population of Kenya (37.5 million) was multiplied by the estimated rural population, which is 63 percent, totaling approximately 23.6 million people (Office of the Vice-President 2008). Next, this number was multiplied by the percentage of the population aged 15 to 64 (which is more likely to buy and ride bicycles) (see figure 7), which resulted in a total population of 13 million.

It was also assumed that all of those above the poverty line can afford a bicycle, which resulted in slightly over six million people. This was divided by the estimated replacement rate of 2.25 years per bike to get an estimate of 2.727 million potential annual sales to rural Kenyans.

Finally, 2.727 million annual sales were divided by 3, the average number of working-age individuals per household (see appendix 4) which resulted in an addressable bamboo bicycle market size of approximately 909,000.

It was assumed that ten percent of those below the poverty line will be able to afford bicycles; adding those in, the total addressable bicycle market size is approximately 1.011 million.

By doing the same calculations for Nyanza Province and Kisumu District, one can see that there is a potential addressable mar-

Page 16 3. Current rural bicycle market ket in these locations of 104,000 and 9,000, respectively (refer to figure 7 for further details).

Figure 7: Potential addressable markets

million

Sources: SIPA and MCI.

Page 17 3. Current rural bicycle market

3.3. Market penetration rate and gap

There is an estimated market penetration rate of 41 percent for the rural market in Kenya. The potential unpenetrated market is 774,000 bicycles, for an approximate value of US$38,700,000.

Figure 8. Potential unpenetrated market

US$ Actual market 11,850,000 Potential unpenetrated market 38,700,000 Total potential market size 50,550,000

Number of bicycles Actual market 237,000 Potential unpenetrated market 774,000

Total potential market size 1,011,000

Sources: SIPA and MCI.

Page 18 4. Operational considerations

4.1. Key findings

Constructing a single bamboo bicycle will take approximately 81 minutes and cost approximately US$35. A bamboo bicycle facility with 20 workers capable of producing 30,000 bicycles per year will cost approximately US$1,050,000 in the first year, with setup costs totaling approximately US$84,000. The break-even point takes place after two years.

4.2. Bamboo bicycle assembly

One bamboo bicycle can be constructed in approximately 81 minutes by an assembly line of 20 workers using advanced power tools. A two-person team working with hand tools can assemble a bike in 120 minutes (KPMG 2008, p. 14).

4.2.1. Production format

Constructing a bamboo bicycle can be accomplished through either an assembly line format or from start to finish by two people. The assembly line would consist of 20 workers, each of whom would be responsible for one part of the construction. To contrast, a two-person team working together to construct one bicycle could produce four bicycles per person (80 bikes total based on 20 workers) per working day (KPMG 2008, p. 14), whereas our calculations show that an assembly line of 20 workers could increase this output to approximately 6.3 bicycles per person per day (127 bikes total with 20 workers) (Industry participant interview 2009). To reach more of the market, the assembly line format would allow the business to increase its capacity with added workers.

4.2.2. Construction process

Hand tools will be used for the majority of the process, but power tools, particularly a drill press, are necessary to maintain precision when mitering bamboo.

There are three main steps to constructing a bamboo bicycle. First, the bamboo must be cut to size to increase its strength and resistance to damage. Second, the bamboo is mitered and assembled into a bicycle frame on a jig and bound together with resin and sisal fiber. Finally, after a period for drying, the manufactured components are fitted onto the bamboo frame.

Step 1

There are two options for increasing the strength and durability of bamboo: treating the bamboo with chemicals such as borax or treating the bamboo with heat and flame. From the standpoint of effectiveness, flame and heat treatment strengthens the bamboo more than chemical treatment. There are also health and environmental benefits as workers do not have to come into contact with or dispose of the borax and other chemicals. Bamboo is treated with a flame torch until it browns, after approximately two minutes, and then is heated at 100°C for 1.5 hours (Industry participant interview 2009).

Step 2

Using two drill presses, two miter jigs and prepared bamboo, mitering enough bamboo for one bicycle takes approximately five minutes. Fixing the bamboo tubes together and then binding the joints with resin and sisal fiber is the most time-consuming part of the construction, taking between 50 and 60 minutes of labor. After the joints are bound, the resin on the bike must dry over a period of several hours (Industry participant interview 2009).

Step 3

The manufactured components are fitted onto the bicycle, including wheels, pedals, chain, handlebars and a saddle. This takes between 10 and 20 minutes (Industry participant interview 2009).

The total elapsed time of active work for the three steps of production is approximately 81 minutes. An assembly line of 20 workers can produce approximately 127 bicycles per day, as opposed to 10 two-person teams that can produce approximately 80 bicycles per day (KPMG 2008, p. 14) (see appendix 5 for additional details and an alternative scenario).

Page 19 4. Operational considerations

Figure 9. Bamboo bike construction process

Sources: SIPA and MCI.

Research

Research into more economically and socially responsible production processes is ongoing. For example, industrial solar ovens could be developed for bamboo treatment. These ovens can be easily incorporated as the business develops. However, the calculations in this study are based on traditionally used tools and equipment.

4.3. Cost of the venture

4.3.1. Base-case scenario

The base-case scenario is the production of 30,000 bicycles in one year. This is approximately the number of bicycles that can be produced per year by 20 assemblers with appropriate training from The Earth Institute.

Total cost of first-year operations

Sources suggest that initial setup costs (including, for example, equipment purchases and license registration) will cost approximately US$84,000 (Industry participant interview 2009 and Government informant interview 2009). Total operational costs for the first year of production are approximately US$790,000 assuming the factory will produce at 75 percent capacity. This is a conservative assumption accounting for staff turnover and a production learning curve (Industry participant interview 2009). This translates into approximately US$35 per bicycle. In addition to startup costs, the total costs for the first year of operations will be approximately US$875,000.

4.3.2. Investment cost

Setup costs will total approximately US$84,000 in the first year as detailed below.

Page 20 4. Operational considerations

Table 4. Investment costs by category Figure 10. Investment costs

Category Cost (US$) Business Business formation 1,669 formation

Equipment 77,930 Equipment Training 4,000 Total cost 83,599 Training

Sources: SIPA and MCI.

Business formation – US$1,669

Kenyan law requires that potential projects, including business ventures, pay for an Environmental Impact Assessment conducted by the National Environmental Management Authority (NEMA) (NEMA informant interview 2009). In the case of a bamboo bike business ,this fee would translate to US$67 (see NEMA website at http://nema.gov.ke).

Additionally, the business will need to register with various government agencies including the Kisumu Municipal Council and Kenya Bureau of Standards (KEBS). A more complete list can be found on the Kenya Investment Authority’s website at: . These registration fees total US$748. It also must purchase a municipal license costing US$854 (Kenya Investment Authority informant interview 2009). Additional costs for intellectual property rights may occur.

Equipment – US$77,930

Equipment consists of the tools needed to build the bicycles, including jigs and stands to support bicycles through production, and the import and transport costs required to bring the equipment to Kisumu (see appendix 6). The equipment needed includes the following: truck, automated flame-treaters, industrial ovens, two drill presses with various drill bits, two miter jigs, bamboo pull saws, two-sided files, picture jigs, one die for stamping dropouts and an assortment of g loves, goggles and aprons.

Training – US$4,000

Training will take place over ten days and carried out by two volunteers from The Earth Institute (see appendix 7). While only 20 assemblers will be trained in our base-case scenario, if ongoing market research shows that the market is expanding at a great rate, more assemblers can be trained, adding more value to the factory than the cost to train and pay those assemblers.

4.3.3. Operational costs

Production costs to amount to approximately US$35 per bike based on information from various sources.

Manufactured components - US$29.00

Manufactured components are the largest cost component of bamboo bicycles. The cost includes an import tax on bicycle components as well as a value added tax (VAT). Binding materials and transport costs from component countries of origin, such as China, are also budgeted.

Page 21 4. Operational considerations

Labor - US$0.46

The legal minimum wage for a machinist is 5,888 KES per month, or approximately US$72. As unskilled workers gain expertise, they become skilled and their wages increase. Labor considerations reflect this.

Bamboo - US$1.62

Bamboo costs include the cost of growing the bamboo itself, the cost to transport bamboo from Nyanza Province to Kisumu and the cost of propane and electricity needed to treat the bamboo. Bamboo prices are expected to remain relatively stable over the next few years. However, there is always the possibility of fluctuations in the bamboo price (Bamboo industry participant interview 2009).

Indirect costs - US$3.80

Indirect costs consist of the salaries of a manager and other administrative staff at market rates. It also includes the costs of leases, utilities, marketing programs, annual license renewals, employee benefits, pensions, ongoing employee training, safety supplies, and depreciation.

One of the largest costs for a business in Kenya is electricity. Because of high fixed and variable electricity costs, including a marginal fee based on kilovolt consumption, some companies are contemplating switching to generators (Industry participant interview 2009). Electricity charges are based on a five-tier consumption scheme of Commercial and Industrial (CI) categories. CI-1 represents the least consumption and CI-5 represents the most. Most Kisumu businesses fall into the CI-2 category. One CI-2 business owner, whose commercial space measures 11,000 ft2, estimated that his electricity costs nine KES/unit (Industry participant interview 2009). Electricity consumption costs would be similar for a bamboo bicycle facility. This is a conservative estimate based on a comparison of the square footage needed by the bamboo bike facility and the power tools used in bamboo bike production.

Much of the marketing done in Kisumu occurs through word of mouth. For this reason, a budget category to account for giving away 20 bamboo bicycles to influential and well-connected partners that can help promote the bikes is included.

Table 5. Operational costs by category Figure 11. Operational costs

Category Cost per bicy- Manufactured

cle (US$) components Labor Manufactured components 29.00 Bamboo Labor 0.46 Indirect costs Bamboo 1.62 Indirect costs 3.80

Total cost 34.88

Sources: SIPA and MCI.

Page 22 5. Financial case study

5.1. Key assumptions

 20 trained bicycle assemblers in an assembly format will build 31,600 bicycles per year. Assuming a scrap rate of five percent leaves the business with 30,000 quality bicycles.  100 percent of bicycles produced are sold each year.  Average price of bicycle is US$37 based on average seven percent markup of bicycles and ability to pay.  Growth rate of bicycle industry at zero percent.  Discount rate set at 20 percent.

Figure 12. Financial case study 0 1 2 3 4 5 Year 0 Revenues (US$) Number of bicycles 22,500 30,000 30,000 30,000 30,000 Price per bike 37 37 37 37 37 Total revenues 832,500 1,110,000 1,110,000 1,110,000 1,110,000

Operational costs (US$)

Direct material 684,188 912,251 912,251 912,251 912,251 Direct labor 18,320 18,320 18,320 18,320 18,320 Overhead 4,700 79,324 93,463 93,463 93,463 93,463 Income taxes 12,950 23,540 23,540 23,540 23,540 Less: Depreciation 7,499 7,499 7,499 7,499 7,499 Total operational costs 4,700 787,284 1,040,075 1,040,075 1,040,075 1,040,075

Capital expenditures 78,745 177 177 376 713 177 (US$) Total cash flow (US$) (83,445) 45,040 69,748 69,549 69,212 69,748

Sources: SIPA and MCI.

The bamboo bicycle venture in Kisumu is an attractive investment opportunity based on the assumptions made above. In this base case scenario, the net present value of producing 30,000 bicycles a year with a twenty percent discount rate would be US$86,817 with an internal rate of return of 65% percent. The payback period for this base case is less than two years.

In the first year, it is assumed that only 75 percent of potential production is reached.

Page 23 5. Financial case study

Figure 13. Expected cash flows (base case)

Expected cash flows ‐ base case Net present value US$86,817 80,000 60,000 Payback period < 2 years 40,000 IRR 65% 20,000 0 (20,000) 123456 Cash flows ($) (40,000) (60,000) (80,000) (100,000)

Sources: SIPA and MCI.

5.2. Break-even analysis

The break-even point can be calculated in two ways. In the first method, a discount rate of 20% is used to compute how many units it would take to reach a net present value of US$0 in a five year time span. Using this method, the production facility must produce 12,316 bicycles each year for five years.

Figure 14. Break-even analysis

40,000 Break‐even in 5 years Net present value US$0

20,000 Payback period 5 years

0 IRR 10% 123456 (20,000)

Cash flows ($) (40,000) (60,000)

(80,000)

(100,000)

Sources: SIPA and MCI.

In the second method, the number of units it would take to break even is computed. In year one, fixed costs amount to approximately US$101,000, variable costs of approximately US$30.6 per bicycle and an wholesale price of US$37 per bicycle (see section 4.3.).

Break Even = Fixed Cost / (Unit Price - Variable Unit Cost)

This method gives us a total of 15,780 bicycles to break even.

Page 24 5. Financial case study

Figure 15. Revenues and costs

1,200,000

1,000,000

800,000

600,000 Total Revenue

400,000 Total Costs Fixed Costs 200,000

Sources: SIPA and MCI.

5.3. Demand sensitivity analysis

There are a number of alternative scenarios depending on our market size and penetration (see appendix 8 for other scenarios not summarized here).

5.3.1. Current bamboo bicycles market

The following analysis is based on the current bicycle market and the assumption that current bicycle owners are the only potential customers. This market is sized at 237,000.

Five percent penetration of the current market

A five percent penetration assumes a production of 11,850 bicycles per year. This will result in a net present value of (US$9,516) and an IRR of 14 percent.

Figure 16. Five percent penetration of the current market

Five percent penetration of current market 40,000 Penetration rate 5.00% 20,000 Net present value (US$9,516) 0 Payback period < 4 years (20,000) 123456 (40,000) IRR 14% Cash flows ($) (60,000)

(80,000) (100,000)

Sources: SIPA and MCI.

Page 25 5. Financial case study

Ten percent penetration of the current market

A ten percent penetration assumes a production of 23,700 bicycles per year. This will result in a net present value of US$53,379 and an IRR of 49 percent.

Figure 17. Ten percent penetration of current market

10 percent penetration of

Penetration rate 10.00% current market 80,000 Net present value US$53,379 60,000 40,000 Payback period < 2 years 20,000 0 IRR 49% (20,000) 123456 (40,000) Cash flows ($) (60,000) (80,000) (100,000) Sources: SIPA and MCI.

5.3.2. Total addressable bicycle market

The following analysis is based on the total addressable bicycle market which is sized at 1,011,000.

One percent penetration of the total addressable market

A one percent penetration assumes a production of 10,110 bicycles per year. This will result in a net present value of (US$18,752) and an IRR of 8 percent.

Figure 18. One percent penetration of total addressable market

One percent penetration of total addressable market Penetration rate 1.00% 40,000 20,000 Net present value (US$18,752) 0 Payback period < 5 years (20,000) 123456 (40,000) IRR 8% Cash flows ($) (60,000) (80,000) (100,000)

Sources: SIPA and MCI.

Page 26 5. Financial case study

Five percent penetration of the total addressable market

A five percent penetration assumes a production of 50,550 bicycles per year. This will result in a net present value of US$151,933 and an IRR of 68 percent.

Figure 19. Five percent penetration of total addressable market

Five percent penetration of

total addressable market Penetration rate 5.00% 150,000 Net present value US$151,933 100,000

Payback period < 2 years 50,000

IRR 68% 0

(50,000) 123456 Cash flows ($)

(100,000)

(150,000)

Sources: SIPA and MCI.

Ten percent penetration of the total addressable market

A ten percent penetration assumes a production of 101,100 bicycles per year. This will result in a net present value of US$306,797 and an IRR of 68 percent.

Figure 20. Ten percent penetration of total addressable market

Ten percent penetration of total Penetration rate 10.00% addressable market Net present value US$306,797 300,000 200,000 Payback period < 2 years 100,000 IRR 68% 0 123456 (100,000) Cash flows ($) (200,000) (300,000)

Sources: SIPA and MCI.

Page 27 6. Implementation and risks

6.1. Demand

6.1.1. Current situation

The limited number of bamboo products currently being manufactured or sold in Kenya make the prospect of a bamboo bicycle a true novelty. In March 2009, a prototype was showcased at the Kisumu MCI office and tested by the Boda Boda Association. Initial feedback was positive. Members of the Association were impressed by the high quality of the parts and the bike’s light weight, strength and comfort. Currently, bamboo is seen as a high-class product, whereas bicycles are not; this juxtaposition will make for interesting marketing of the product.

6.1.2. Potential risks

Even though the bamboo bicycle was received positively, there is a perception that the bamboo is not strong enough to withstand being used on a bicycle. Additionally, if better and cheaper parts cannot be secured, the demand for bamboo bicycles will not exceed that of metal bicycles. Finally, the bicycle industry demand would be too limited if confined to Kisumu and Nyanza Province.

6.1.3. Potential solutions

Before full production, a few bicycles should be handed out to boda boda drivers, health care workers, NGOs, and farmers, among others, not only for testing purposes, but also to help change the perception in the community that bamboo is a luxury product. Heavy advertisement, primarily through word of mouth, should begin before full production. At the same time, improvements can be made to the bicycle design. During production, other prototypes should be researched for diversification of future products. Exports should also be considered to increase the market size.

6.2. Imported supplies

6.2.1. Current situation

Most current bicycle parts are shipped from India or China through Mombasa and Nairobi before reaching Kisumu where they are sold by various distributors, mainly bicycle retail and repair shops. However, the imported parts are poor in quality and need to be replaced constantly due to bicycle usage and road conditions in Kenya. By contrast, when the bamboo bicycle was showcased to boda boda operators, they were impressed with the high quality parts from the United States.

6.2.2. Potential risks

If the existing distributors are cut out of the process, a valuable distribution chain would be lost. Additionally, if existing distributors cannot supply the parts for bamboo bicycles, their businesses may be impacted negatively if bamboo bikes replace imported bikes. With the global economic crisis, there may also be price fluctuations for both parts and transport.

6.2.3. Potential solutions

In order not to jeopardize the existing distribution chains, it may be better to work with existing distributors to import better parts. Furthermore, because of established relationships, negotiation of trade terms to absorb the shock of fluctuating transport costs could be simplified. For instance, to mitigate the fluctuating price of goods, foreign exchange forward contracts could be utilized.

6.3. Bamboo

6.3.1. Current situation

There is plenty of native bamboo growing on government-owned land in Kenya, with a comparatively small amount growing on farms. Harvesting bamboo on government land is illegal, so the bamboo bicycle facility must purchase bamboo harvested from farmers with a permit to cut bamboo. The permit is free and there is no limiting quota. As a result of projects being imple-

Page 28 6. Implementation and risks

mented by Maseno University and KEFRI, an increasing number of farmers are beginning to grow bamboo. KARI also has its own bamboo farms from which it sells bamboo. Projections provided by the ABC indicate there will be enough domestic bamboo available to produce at least 30,000 bicycles per year (Bamboo industry participant interview 2009).

6.3.2. Potential risks

Because the nascent bamboo industry has no reliable supply chain or distribution network, it might be difficult to ensure effective supply and quality. Testing is being done on indigenous bamboo to ensure quality of strength; results are pending. Also, bamboo needs large quantities of water in its first three years to grow properly. Access to water in certain areas may be an issue.

6.3.3. Potential solutions

Providing support to bamboo farmers through bamboo specialists will help to ensure the quality of the bamboo. Negotiating fair contracts will also help to ensure proper supply. Distribution networks are starting to develop between farmers and distributors. With increasing demand, bamboo infrastructure is also forecasted to improve (Bamboo industry participant interview 2009).

6.4. Labor

6.4.1. Current situation

The unemployment rate in Kisumu is high, at 37 percent (Republic of Kenya 2002). Many local businesses pay their employees less than the minimum wage; however, as this is illegal, the transgressors run a risk of huge fines. The bicycle industry includes bicycle repairmen, dealers, and craftspeople. These people could potentially be employed to work on bamboo bikes.

6.4.2. Potential risks

One of the potential risks for labor is retention of trained employees. Many workers in Kisumu are seasonal workers who work on their farms for parts of the year. High turnover results in increased training costs, loss of industry knowledge, and delays in production.

6.4.3. Potential solutions

Bamboo bicycles will pay laborers at least a minimum wage depending on skill level. In order to retain trained workers, there will be monetary incentives, benefits and promotion tracks, as well as a flexible work program allowing workers to enter and exit the factory workforce on a seasonal basis.

6.5. Factory

6.5.1. Current situation

One of the primary issues in starting a new factory is finding a proper location. A corresponding issue is whether to purchase land for a factory or rent an existing space. A factory located in or close to the Kisumu city center would be ideally located. In urban locations, basic infrastructure is often already provided, so there should be no need to arrange for the routing of water, sewage and electricity, for example. However, because city centers are prime locations, few spaces are often available for rent.

In rural areas, if infrastructure is lacking, start-up costs will be much higher. In addition, establishing water and electricity provision in an area that has no existing infrastructure will take significant time and effort. However, by locating a factory in a rural area, an investor can provide cheaper wages (i.e. on average, rural workers are paid less than their urban counterparts) (Industry participant interview 2009).

Purchasing land provides greater long-term stability; however, it is estimated that up to 15 years are required before a break- even point is obtained (Industry participant interview 2009). With support from intermediaries such as the Lake Basin Develop- ment Authority (LBDA), it might be possible to obtain land, particularly for a development venture such as bamboo bikes.

On average, to purchase a 5000 ft2 space costs between 15,000,000 KES to 25,000,000 KES (or between US$182,927 and

Page 29 6. Implementation and risks

US$304,878), with an additional 4.4 percent of the purchase value being allocated to property taxes. Rent for a similar space costs approximately 200,000 KES (or US$2,439) per month (Industry participant interview 2009).

6.6. Development impact

6.6.1. Economic development

Bamboo bike production can have a positive impact on the local economy. Setting up a local bamboo bike industry might not only create jobs for the youth and Jua Kali of Kisumu, but also establish a significant value chain for distributors, suppliers, and farmers. The local government would be supported through taxes. A bamboo bike industry would also help address the transportation needs of rural dwellers.

6.6.2. Environmental impact

Bamboo bicycles also have a positive impact on the environment in both the early and late stages of production. Bamboo itself has a number of environmentally friendly qualities and a lower negative environmental impact than traditional metal bicycles.

Bamboo benefits

Bamboo helps improve air and water quality in areas where it is harvested. Additionally, its root system is constructed in such a way as to reduce soil erosion, a major concern for many farmers. It does not leach many nutrients from the ground, and as it pulls silica from the soil, it is well-suited for the kind of sandy agricultural land found in the Kisumu region (Bamboo industry participant interview 2009).

There are over 2000 documented uses of bamboo according to Dr. Jacob Kibwage of Maseno University (2009). In addition, leftover bamboo can be used for items such as furniture production, thereby helping to reduce waste.

Process benefits

Less electricity is needed to build a bamboo bike than a traditional metal bike. Also, the bamboo used for bamboo bikes is not treated with the same chemicals used for other bamboo treatment processes in Kenya. As a result, there is no need to dispose of chemicals, and people do not come into contact with chemically-treated bamboo.

6.3. Social impact

Health care delivery

A community health worker can visit more patients and deliver urgent care using a bamboo bicycle than with an imported bike. In addition, bamboo bikes are in some ways more reliable as a form of transportation to help carry patients to hospitals or clinics.

Education

The number of primary schools in Kenya significantly outnumber the number of secondary schools, and as a result, many rural children (and their parents) are forced to travel long distances to get to these schools, walking, in some cases, up to 2 hours daily. This is one reason why many children drop out of school. By increasing the affordability and accessibility of bicycles, school enrolment and attendance rates may increase.

Page 30 7. Conclusion and next steps

7.1. Conclusion

In many ways, Kisumu is an ideal location for the production of bamboo bicycles.

In particular, there is a large potential market in rural areas. Additionally, the end user’s price of approximately US$50 is cheaper than all other models on the market in Kenya. Further, the US$50 bamboo bicycle will be of much higher quality than currently available imported metal bicycles.

However, the customer perception of bamboo could be a significant impediment to bamboo bicycle production. While some people are aware of the functionality and versatility of bamboo, others perceive it as a weak material and, in some cases, a luxury good (Bamboo industry expert interview 2009). To overcome these perceptions, a pilot program could help spread information about the bamboo bicycles initiative by “word of mouth.” A pilot program would also allow the potential investor to determine demand levels more accurately.

7.2. Next steps

This business plan sought to determine the feasibility of a bamboo bicycle venture in Kisumu, Kenya. Our research suggests that such a venture is viable and can be profitable. The next steps are outlined below.

7.2.1. Investors

In order to generate employment and further economic development in the region, the bamboo bikes project seeks an investor in Kisumu. A local investor would be ideal, although international investors are also encouraged to inquire about opportunities. Other potential investment opportunities include joint ventures, such as a public-private partnership based in Kenya, or a coali- tion of NGOs pooling their resources together to invest in the project.

Further research needs to be conducted with respect to the potential market for government community health workers. Should this market be viable, there is significant potential for government procurement contracts as well.

One option to reduce costs is to import more durable parts directly from China. The threat of the Chinese market with regard to bamboo bicycles has not been determined, although sources have claimed that Chinese suppliers have flooded bicycle markets with bikes when new competitors have arisen in other locations (Industry expert interviews 2009). If China is brought into the equation as a potential investor, this threat may be dampened.

7.2.2. Quality assurance

Research on the design and durability of the bamboo bicycle is ongoing. To ensure the longevity of the venture, periodic assessments for quality assurance will need to occur.

7.2.3. Impact assessment

This business plan proposes that bamboo bicycles could potentially have a positive local environmental, social and economic impact. Monitoring and evaluating the positive and negative impact of the project will be crucial.

7.2.4. Millennium Villages Project (MVP)

Collaboration with the MVP in Sauri provides an opportunity to develop an agro-processing link with the Millennium City of Kisumu and strengthen farm-to-market linkages in the region. Additional research needs to be conducted to determine the viability of the various bamboo species in the area. In particular, Maseno University’s Tobacco-to-Bamboo Project and KEFRI are both working to test various local and foreign bamboo species for suitability as bicycle components.

7.2.5. Attitudinal barriers

Further research needs to be conducted regarding existing attitudes towards bamboo and its use as a bicycle material. While initial reaction to the product has been very positive, other potential issues may come up once the novelty of the product has worn off. Understanding perceptions will also aid in the marketing of the product.

Page 31 Appendix 1. Boda Boda market

Appendix 1. Boda Boda market

To assess the size of Kisumu’s boda boda market, the following methodology was employed. First, the current market was size the growth rate determined. This was followed up by interviews with the boda boda drivers. The current replacement rate and amount spent annually on repairs was also assessed. Whenever repair costs reached the cost of a new bicycle (including reinforcement), this was considered as “replacing” the bicycle (see below). With this method, a replacement rate of 31 percent was calculated.

Several other indicators were used, including GDP per capita, which grew at four percent in 2007 (according to the Office of the Vice-President 2008). Also, due to their increasing popularity, imports of motorcycle taxis more than quadrupled from 5,212 in 2006 to 29,072 in 2007 (Office of the Vice-President 2008, p. 183). However, bicycle imports have dropped or remained constant for the last several years (see appendix 2). As a result, the boda boda market size is estimated to decrease by 25 percent from the current market size.

Finally, it was estimated that with proper marketing and the “novelty” factor, 50 percent of bicycles replaced in the next year will be replaced by bamboo bicycles, resulting in a total market of 1,163 bamboo bicycles in the first year.

Figure A1.1: Boda boda market, first year (number of bicycles)

Sources: SIPA and MCI.

Table A1.1. Replacement rate for Boda bodas

Replacement rate = 1 / (annual repair per bike / cost of bike + alteration)

Annual amount Market spent on repairs, Cost of bike Alteration segment per bike (KES) (KES) (KES) Replacement rate

Boda boda 17,441 4,500 960 0.31

Sources: SIPA and MCI.

Page 32 Appendix 2: Calculation of current market size

Appendix 2. Calculation of current market size

Method 1

In this first method, it is assumed that a portion of imported bicycles over the last 10 years have remained in the market. The sum of all imported bikes over the last ten years is used to calculate the current market size.

Table A2.1. Bicycle imports by year, 1998-2007

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Bicycle

quantity 139,547 158,760 135,221 246,941 386,503 446,637 722,407 300,214 213,554 240,850

Percent still in market 10% 10% 10% 10% 10% 10% 50% 75% 90% 100%

Bicycles still in market 13,955 15,876 13,522 24,694 38,650 44,664 361,204 225,161 192,199 240,850 Total bicycles still in market 1,170,774

Source: Office of the Vice-President 2008.

Method 2

In the second method, it is assumed that 100 percent of imported bicycles over the last two years (213,554 + 240,850) remain in the market.

Table A2.2. Method 2 for calculating the current market size

Total bicycles still in market 454,404

Source: Office of the Vice-President 2008.

Method 3

The method used to calculate the current market size is similar to the first method. However, in this case, Ministry of Trade data is used rather than data from the Office of the Vice-President.

Page 33 Appendix 2. Calculation of current market size

Table A2.3. Number of bicycles imported by country, 2005-2007

2005 2006 2007 Australia 112 2 21 Austria -- 2 -- Belgium -- 7 -- Brazil -- 1 1 Bulgaria -- -- 150 Canada 10 1 417 China 96,843 90,414 163,809 Cyprus 10 6 13 Denmark -- -- 4 Eritrea -- 1 -- France 11,441 11 10 Gambia -- 300 -- Germany 72 1,065 114 Hong Kong 5,321 -- 1,301 India 144,509 139,661 66,158 Iran -- -- 1 Ireland -- 32 -- Israel 10 5 -- Italy 104 52 52 Japan -- 1,764 -- Japan 1,411 -- 1,610 Korea 7 -- 400 Malaysia 15 -- 3 Netherlands 233 147 67 New Zealand 16 -- Norway -- 1 3 Pakistan 1 21 -- Saudi Arabia 9 24 8 Singapore -- -- 2 South Africa 12 -- -- Spain -- 10 -- Sweden 2 -- 18 Switzerland 433 82 533 Taiwan 32 2 490 Thailand 155 324 560 United Arab Emirates 12,953 5,183 2,256 United Kingdom 7,145 332 1,721 United States 3,684 321 1,131 Total number of bicycle imports 284,540 239,771 240,853 Growth rate -16% 0.45% Percent of bicycles still in market 50% 75% 100% Number of bicycles still in market 142,270 179,828 240,853 Total bicycles still in market, 2005- 2007 562,951 Page 34 Source: Based on information obtained from Ministry of Trade 2009. Appendix 2. Calculation of current market size

Method 4

In the fourth method, it is assumed that 100 percent of the imported bicycles from the last two years (239,771 + 240,853) remain in the market using the Ministry of Trade figures.

Table A2.4. Method 4 for calculating the current market size

Total bicycles still in market 480,624

Source: Based on information obtained from Ministry of Trade 2009.

Page 35 Appendix 3. Potential rural market size

Appendix 3: Potential rural market size

To estimate the potential rural market size, different replacement rates according to potential repair costs for the rural commuters was used. For the purposes of this study, the middle scenario (scenario two) was used, with annual repairs of 2,000 KES and a replacement rate of 2.25.

Table A3.1. Possible scenarios for calculating the bicycle replacement rate

Annual repair per bike (KES) Cost of bike (KES) Replacement rate Scenario 1 1,000 4,500 4.50 Scenario 2 2,000 4,500 2.25 Scenario 3 4,500 4,500 1.00

Source: SIPA and MCI.

Scenario 1: A replacement rate of 4.5 gives us a total market for Kenya of 505,000 households, 52,000 households for Nyanza province and 4,000 households for Kisumu district.

Table A3.2. Scenario 1—calculating the potential market

Total population, below and / Working-age above poverty Proportion x Above individuals per = Potential line in rural / x Age of poverty x 10% Below / Replacement household, on market (thousands) any area 15-64 line poverty line rate average (thousands) Kenya above poverty line 37,530 63% 55% 47% 4.50 3 454 Kenya below poverty line 37,530 63% 55% 53% 10% 4.50 3 51 Nyanza above poverty line 4,164 62% 58% 41% 4.50 3 45 Nyanza below poverty line 4,164 62% 58% 59% 10% 4.50 3 7 Kisumu above poverty line 536 36% 61% 47% 4.50 3 4 Kisumu below poverty line 536 36% 61% 53% 10% 4.50 3 0

Sources: SIPA and MCI.

Page 36 Appendix 3. Potential rural market size

Scenario 2: A replacement rate of 2.25 gives us a total market for Kenya of 1,011,000 households, 104,000 households for Nyanza province and 9,000 households for Kisumu district.

Table A3.3. Scenario 2—calculating the potential market Total population, below and above x / Working-age poverty Proportion x Above x 10% individuals per = Potential line rural / any x Age of poverty Below household, on market (thousands) area 15-64 line poverty line / Replacement rate average (thousands) Kenya above poverty line 37,530 63% 55% 47% 2.25 3 909 Kenya below povery line 37,530 63% 55% 53% 10% 2.25 3 102 Nyanza above poverty line 4,164 62% 58% 41% 2.25 3 91 Nyanza below povery line 4,164 62% 58% 59% 10% 2.25 3 13

Kisumu above poverty line 536 36% 61% 47% 2.25 3 8 Kisumu below povery live 536 36% 61% 53% 10% 2.25 3 1

Sources: SIPA and MCI.

Scenario 3: A replacement rate of 1.00 gives us a total market for Kenya of 2,276,000 households, 234,000 households for Nyanza province and 20,000 households for Kisumu district.

Table A3.4. Scenario 3—calculating the potential market Total population (thousands) below and x / Working-age above Proportion x Age x Above individuals per = Potential poverty rural / any of 15- poverty x 10% below household, on market line area 64 line poverty line / Replacement rate average (thousands) Kenya above poverty line 37,530 63% 55% 47% 1.00 3 2,045 Kenya below poverty line 37,530 63% 55% 53% 10% 1.00 3 231 Nyanza above poverty line 4,164 62% 58% 41% 1.00 3 205 Nyanza below poverty line 4,164 62% 58% 59% 10% 1.00 3 29 Kisumu above poverty line 536 36% 61% 47% 1.00 3 18 Kisumu below poverty line 536 36% 61% 53% 10% 1.00 3 2

Sources: SIPA and MCI. Page 37 Appendix 4. Average household information

Appendix 4. Average household information

In the 1999 Census, there were 6,371,370 households in Kenya (with a total population of 28,686,607), and approximately 4.5 persons per household. It is assumed that 50 percent of working women don't ride bicycles, per interviews conducted in March 2009. As a result, dividing 4.5 persons per household by 1.5 (assuming there is 1 working male and 1 working female per household) results in 3 working-age individuals per household on average.

Page 38 Appendix 5. Operational considerations

Appendix 5. Operational considerations

There are a number of different options for setting up a bamboo bicycle facility. The assumption made for the base-case scenario is that all steps of production are in-house and bicycles will be distributed from the factory ready to ride. The production model assumes 250 eight-hour working days per year. The productive capacity of the factory will be approximately 31,600 bicycles per year; assuming a five percent scrap rate leaves the business with 30,000 quality bicycles to sell per year. This translates to about 127 bamboo bicycles produced by the factory per day.

This calculation is reached by assigning realistic amounts of time to each step in the production process, using a workforce of 20 workers based on interviews with industry participants. Any extra time a worker has in a given workday would be allotted to other steps in the production line that take longer. The time it would take for one worker to complete each step of the production process per bicycle is detailed below in table A5.1. Estimated times are based on what the factory could produce once it is already running; slower bicycle buildup times at the start of operations are reflected in our assumption that the factory will produce at 75 percent capacity in its first year.

Table A5.1. Bicycle production steps overview

Production step Description Minutes per bicycle Step 1 Cutting bamboo Cutting bamboo pieces to size 5 Mitering bamboo Mitering bamboo pieces to fit together 5 Step 2 Metal on jig Assembling metal tubes on jig 1.5 Bamboo on jig Assembling bamboo tubes on jig 2 Dropouts into stays Fitting metal dropouts into bamboo stays 2.5 Tacking bamboo Preliminarily gluing pieces together 9 Packing filler Packing filler into bicycle joints to pre- 10 pare for joint wrapping Wrapping joints Wrapping joints with resin-soaked fiber 30 Step 3 Fitting metal Attaching seat, handlebars, chain wheel, 16 components onto chain, wheels to bicycle completed bicycle Total 81

Source: SIPA and MCI.

A potential layout of a model bamboo bicycles factory can be found in figure A5.1. This layout would be applicable for production of different quantities of bicycles, as the main constraints are simply factory space and number of workers.

Page 39 Appendix 5. Operational considerations

Figure A5.1. Potential layout of a bamboo bicycle facility

Ventilation

windows Delivery Door Flame treatment area

Bamboo cutting area Rack for Rack for cut bamboo treated bamboo

Oven

Mitering Completed frame station drying area

Metal pieces onto jig

Bamboo pieces onto jig

Joint wrapping Dropouts into Fit seat station stays

Fit handlebars Tack bamboo to metal

Fit wheels Filler into joint corners

Fit chain wheel and chain Frames placed on racks for resin to dry Loading door for finished bicycles

Source: SIPA and MCI.

Page 40 Appendix 5. Operational considerations

Another option worth pursuing is outsourcing the third step of production. Bicycle distributors currently hire local mechanics to assemble bicycles for sale. Assembling the metal components of the bicycles is one of the most time-consuming steps, taking approximately 16 minutes to complete. Outsourcing this step while maintaining a workforce of 20 workers would increase post-scrap bicycle production to 38,000 bicycles per year.

Table A5.2. Bamboo bicycle type of production overview

Type of production Time to complete Bicycles Bicycles Quality bicycles one bicycle* produced produced produced per year per day per year (post-scrap) Complete in-house 81 minutes 126 31,600 30,000 Outsourcing third 65 minutes 160 40,000 38,000 step

Source: SIPA and MCI.

*This time does not include the approximately 14 minutes needed to flame treat the bamboo and the 90 minutes needed to heat it in an oven. These steps were discounted because they will be mechanized.

Page 41 Appendix 6. Equipment costs

Appendix 6. Equipment costs

The pieces of equipment needed for bamboo bicycle production are detailed in the below table. The costs were gathered from various sources.

Table A6.1. Bamboo bike equipment cost breakdown

Expenses Cost in US$ Equipment

Drill press1 195.12 Drill bits1 97.56 Miter jig1 400.00 Industrial oven1 1,216.00 Automated flame treaters1 400.00 Picture jigs1 199.76 Truck1 63,414.63 Computer2 536.59 Pull saws3 30.97 Files1 48.00 Die1 1,600.00 Subtotal: 68,138.63

Import costs Import tax1 2,591.51 Subtotal: 2,591.51

Shipping costs1 Overseas 3,900.00 Overland 3,300.00 Subtotal: 7,200.00

Total equipment cost: 77,930.14

1: Industry participant interview 2009. 2: http://arcticcomputershop.com, accessed May 2009. 3: http://www.made-in-japan.bz/kabasawa, April 2009.

Page 42 Appendix 7. Training costs

Appendix 7. Training costs

Training costs were calculated based on the assumption that the volunteers themselves will not be financially compensated but that all of their travel costs will be covered by the initiative. The approximately $4,000 in expenses includes two roundtrip tickets to Kisumu, 14 days of housing at a local guest house, two weeks of meals based on local prices, and additional funds for transportation and other expenses. Expenses are detailed below in Table A7.1.

Table A7.1. Training costs (2 volunteers) [not sure if costs below are very realistic]

Description of cost Cost in US$ per person per Total cost in US$ for unit two weeks Round-trip plane tickets 1,304 2,608 from New York City to Nai- robi1 Round-trip plane tickets 181.60 363.20 from Nairobi to Kisumu2 Housing in Kisumu per 12 336 night3 Meals per week4 50 200 TOTAL 3,507.20

1Price obtained 24 April 2009 from http://www.orbitz.com. 2Price obtained 13 March 2009 from Journey Corp, MCI’s travel agent. 3Price based on Sooper Guest House’s rate for a single room. 4Price estimate based on the SIPA team’s experience in Kisumu.

Page 43 Appendix 8: Demand sensitivity

Appendix 8: Demand sensitivity

For a market penetration rate of 20 percent and a total market size equal to our current market, the following net present value and internal rate of return were calculated.

Table A9.1. Net present value and internal rate of return for market penetration rate of 20 percent and total market size equal to current market

Bicycle Amount needed Penetration rate 20.00% market size to produce Net present value US $142,283 237,000 47,400 Payback period < 2 years IRR 68% Sources: SIPA and MCI.

For a market penetration rate of 20 percent and a total market size equal to our total addressable market, the following net present value and internal rate of return were calculated.

Table A9.2. Net present value and internal rate of return for market penetration rate of 20 percent and total market size equal to total addressable market

Bicycle Amount needed Penetration rate 20.00% market size to produce Net present value US$616,524 1,011,000 202,200 Payback period < 2 years IRR 69% Sources: SIPA and MCI.

Page 44 References

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MCI AND VCC WORKING PAPER SERIES ON INVESTMENT IN THE MILLENNIUM CITIES

No 8/2009

ASSESSING INFRASTRUCTURE CONSTRAINTS ON BUSINESS ACTIVITY IN BLANTYRE, MALAWI

Zaki Raheem

APRIL 2009

432 Park Avenue South, 13th Floor, New York, NY10016, United States Phone: +1-646-884-7422; Fax: +1-212-548-5720 Websites: www.earth.columbia.edu/mci; www.vcc.columbia.edu

MCI and VCC Working Paper Series No 08/2009

A separate MCI working papers series on the social sector is also available.

For more information, please refer to the MCI website at: http://www.earth.columbia.edu/mci/ and the VCC website at: http://www.vcc.columbia.edu/.

Copyright © 2009 by the Millennium Cities Initiative (MCI). All rights reserved. Unless otherwise indicated, this working paper may be reproduced, quoted or cited without permission of the author(s) provided there is proper acknowledgement. The responsibility for the contents of this Working Paper remains with the author(s). Accordingly, this publication is for informational purposes only and is meant to be purely educational. While our objective is to provide useful, general information, the Millennium Cities Initiative and the Vale Columbia Center make no representations or assurances as to the accuracy, completeness, or timeliness of the information. The information is provided without warranty of any kind, express or implied. This publication does not constitute an offer, solicitation, or recommendation for the sale or purchase of any security, product, or service. Information, opinions and views contained in this publication should not be treated as investment, tax or legal advice. Before making any decision or taking any action, you should consult a professional advisor who has been informed of all facts relevant to your particular circumstances.

Table of Contents

TABLE OF CONTENTS 3 ACRONYMS 4 EXECUTIVE SUMMARY 5 1. INTRODUCTION & PURPOSE 8 1.1. MCI BACKGROUND 8 1.2. OBJECTIVES 8 2. METHODOLOGY 11 2.1. LIMITS TO RESEARCH 11 2.2. INTERVIEW SCHEDULE 12 3. RESULTS 14 3.1. ELECTRICITY 14 3.2. OTHER ENERGY OPTIONS 19 3.3. WATER 20 3.4. WASTE DISPOSAL 23 3.5. TELECOMMUNICATIONS 24 3.6. TRANSPORTATION 27 3.6.a. Ground Transportation 27 3.6.b. Air Transportation 31 3.6.c. Port Access and Rail Rehabilitation 31 3.6.d. Urban Transport 31 3.7. LAND 32 3.8. SECURITY 33 4. OPPORTUNITIES FOR INFRASTRUCTURE INVESTMENT 35 4.1. INVESTMENTS IN SOLAR POWER 35 4.2 RAINWATER HARVESTING 35 4.3 LOW-COST BIOFUEL OPPORTUNITIES 36 4.4 PLASTICS RECYCLING PLANT 38 4.5 WASTE-TO-ENERGY PROJECT 39 4.6 MINISTRY OF INDUSTRY 2008 PROJECT SUMMARIES FOR POTENTIAL INVESTORS 41 5. CONCLUSION 43 6. APPENDICES 44 1. INFRASTRUCTURE SURVEY 44 2. POVERTY AND THEFT 48 7. REFERENCES 51

ACRONYMS

AGOA - - - - - African Growth and Opportunity Act EIA - - - - - Environmental Impact Assessment ESCOM - - - - Electricity Supply Corporation of Malawi Forex - - - - - Foreign exchange MCI - - - - - Millennium Cities Initiative MERA - - - - - Malawi Energy Regulatory Authority MIPA - - - - - Malawi Investment Promotion Agency PPP - - - - - Public-private partnership SADC - - - - - Southern African Development Community SAPP - - - - - Southern Africa Power Pool SME - - - - - Small and Medium Enterprises UNIDO - - - - United Nations Industrial Development Organization

Assessing Infrastructure Constraints on Business Activity in Blantyre, Malawi

Zaki Raheem1 EXECUTIVE SUMMARY

Infrastructure is inextricably linked to the wellbeing of a city’s commerce and people. Poor roads can delay the supply and delivery of goods to customers, and prevent workers from reaching their jobs. Water interruptions can prevent manufacturing facilities from working at full capacity and mothers from washing children's clothes for school. Electricity shortages can prevent restaurants from operating at night and endanger women walking home from work after dark. Thus, an analysis of infrastructure constraints must account for the political and financial realities placed on businesses and the cultural and socio-economic impact on workers, their families and society at large.

In Blantyre, Malawi, population and economic growth are placing great stress on the city’s infrastructure systems. As Malawi’s industrial capital, long-term improvements to Blantyre’s infrastructure are necessary to generate employment, strengthen rural-urban market linkages, and improve the regional and global competitiveness of the city’s industries.

This study shows that the cost and inefficiency of transporting goods internationally is the greatest infrastructure constraint on business activity in Blantyre. As a landlocked country, Malawi faces high transport costs that are a serious impediment to trade. Thus, there is great need to reduce the price and time it takes to transport goods to, from and within Malawi to ensure that the country’s main industries (a majority of which have branches or are headquartered in Blantyre) can compete internationally.

The high cost and unreliability of electricity was ranked by the city’s businesses as the second most significant infrastructure constraint on business. Smaller businesses located on the outskirts of the city face even greater struggles with respect to electricity.

Along with the cost and reliability of electricity, security ranks as the second largest infrastructure constraint on businesses in Blantyre. Malawi has been relatively politically stable since independence in 1964, and the transition from one-party rule to a multi-party democracy was largely peaceful. In recent years, the country has not experienced any major political instability. However, security concerns, particularly in the form of petty theft, are a major problem for both small and large enterprises throughout Malawi. And because thieves often target transformers, water meters, diesel fuel and warehouse inventory, theft inevitably impacts other infrastructure costs of doing business.

Finally, an unreliable and expensive telecommunications network ranked as the third largest infrastructure constraint to business activity in Blantyre. Most local businesses use both landlines and mobile phones, but find the latter to be more efficient and convenient for business purposes. Half of the businesses surveyed use mobile phones as their main form of communication with suppliers and customers. However, many of the businesses suggested that by allowing greater

1 The author can be reached at [email protected]. The author would like to thank The Earth Institute at Columbia University and the Millennium Cities Initiative staff; Umesh Menon; the Malawi Investment Promotion Agency; Ginger Baker; and especially Shalom Konyani for her support and generosity.

competition among cell phone providers, the Government has sacrificed quality and service. Respondents felt that the two major cell phone companies in Blantyre have been allowed to over- subscribe customers, and that the Government should play a greater role in ensuring better service and standards.

In addition, the study highlights the different set of regulatory and investment challenges faced by local and foreign businesses. It provides an overview of several current infrastructure projects and highlights a number of innovative investment opportunities in Blantyre. Finally, the study takes a close look at the additional burdens that smaller businesses face in comparison to their larger competitors. The particular challenges faced by small and medium-sized enterprises must be addressed.

Box 1 – Main Infrastructure Constraints on Businesses in Blantyre, Malawi

Primary • Cost and inefficiency of transport of goods internationally. Secondary • Cost and unreliability of electricity connection. • Security concerns, particularly regarding frequent petty theft. Tertiary • Unreliable and expensive telecommunications network.

Box 2 - Investments and Constraints Investment Opportunity Constraint Addressed - Expansion of electricity capacity: - More reliable electricity to meet present and future o Upgrade Blantyre electricity grid; demand and eliminate load shedding. o Invest in Lower Fufu Hydropower Plant; o Connect to Southern African Power Pool.

- Improve rail and river transport network from Malawi, through Mozambique to the ports of Beira and Nacala.

- Renewable energy sector: -Enhance sustainable energy options that reduce Expand solar panel manufacturing and/or o reliability on electricity grid and encourage a shift away importation; from wood/charcoal. o Research low-cost biofuel options for improved cooking and lighting technology.

- Renewable water provision: - Ensure more reliable water sources, reduce strain on o Invest in rainwater harvesting. Blantyre Water Board, and lower electricity demands needed to pump water from Shire River.

- Recycling business: - Waste collection could create employment, and generate sustainable returns as a catalyst for further o Invest in plastics recycling facilities.

private investment in recycling.

1. INTRODUCTION & PURPOSE

1.1. MCI Background

In 2000, 189 countries adopted the Millennium Declaration, which established the Millennium Development Goals (MDGs). The Earth Institute’s Millennium Cities Initiative (MCI) assists nine mid-sized cities across sub-Saharan Africa in achieving these goals by 2015. The MCI is an urban counterpart to the Millennium Village Project (MVP), which helps strengthen farm-to-market linkages to enable farmers to transition from subsistence farming to commercial agriculture and non-agriculture activities. As part of these efforts, MCI concentrates on impacting foreign direct investment (FDI) to engender a climate in which foreign investment can thrive – creating employment, stimulating domestic enterprise development and fostering economic growth.

MCI also helps the nine Millennium Cities conduct needs assessments in a number of social sectors – health, education, gender, water and sanitation, transportation, energy and infrastructure – in order to generate integrated development strategies for each city.

1.2. Objectives

The primary objective of this study is to assess current infrastructure constraints to business activity in greater Blantyre and to better understand how infrastructure impacts such activity. Greater Blantyre includes the city center, the neighboring commercial sister city of Limbe, and the industrial sites located on the outskirts of town. By understanding the infrastructure costs of doing business, this study seeks to highlight opportunities for infrastructure investment that could enable existing and emerging businesses to expand, generate more employment, enhance rural-urban market linkages, and improve the regional and global competitiveness of businesses located in and around Blantyre.

For the purposes of this study, the definition of infrastructure will include: electricity, other energy sources, water, telecommunications, waste, ground and air transportation, and land.

Besides being the economic and financial center of Malawi, Blantyre is the country’s largest city, with a 2008 projected night population of approximately 813,000.2 The city’s day population reaches more than one million due to people coming to work from the urban fringe areas.. It is also the capital of the country’s Southern Region. All major road and rail networks pass through Blantyre. It is the country’s southern hub for the import and export of goods to South Africa and the Mozambican ports of Nacala and Beira. Downtown Blantyre hosts a bustling commercial area, a number of prominent hotels and banks, and the Malawi Stock Exchange, which opened in 1996. Industrial sites in the city host a variety of businesses including agro-processors, garment, pharmaceutical, service providers and consumer goods manufactures, as well as breweries and timber companies. Many of the country’s largest exporters of tobacco, tea, sugar, cotton and coffee have major branches or headquarters in Blantyre, as do large traders of imported consumer goods and transportation equipment. The expansion of industrial zones on the outskirts of the city

2 Malawi National Statistics Office (2006). Statistical Yearbook 2006, Chapter 2: Population, http://www.nso.malawi.net/data_on_line/general/yearbook/yearbook_2006/yearbook_2006.html.

highlights the investment opportunities that continue to be exploited by local and foreign entrepreneurs. However, the city’s infrastructure needs vast improvement in order to meet the increasing population and business constraints of the city.

This working paper includes the perspectives of different businesses of varying sizes and backgrounds. The experiences included in this study can be used to assist government agencies, private investors and civil society actors with interest in infrastructure investment in Blantyre.

Additionally, this working paper highlights some of the innovative coping strategies used by businesses in Blantyre to deal with infrastructure challenges. These coping mechanisms, often adopted out of necessity, provide input for the recommended investment opportunities.

Map 1: Malawi Map 2: Millennium Cities

Source: www.vytrak.com Source: earth.columbia.edu/mci

Chart 1: Blantyre Population

Source: www.malawiproject.org

2. METHODOLOGY

In designing the framework for this study, a diverse number of industries were interviewed to ensure that a broad range of opinions were reflected. Interviews were conducted with 12 smaller businesses (< 30 employees), 10 medium-sized businesses (30 – 100 employees), and 11 larger businesses (> 100 employees).3 The breakdown of industry representation, by percentage, is shown below:

Chart 2 –Interviews by Industry

Source: Author

2.1. Limits to Research A total of 35 interviews were conducted for this study. However, data from two interviews was discarded because business owners were unwilling or unable to answer the majority of questions.

A second limit to the research was the potential biases resulting from the types of industries that were interviewed. While there were over 30 interviews, the breakdown of industry type did not correlate directly with industry percentages in Blantyre. While an attempt was made to ensure some level of random and representative sampling, more data about the private sector in Blantyre would have been needed to ensure a statistically relevant array of diverse perspectives. For example, both transport and automotive businesses represent nine percent of interviews in this study; however these industries most likely represent a smaller percentage of actual businesses in Blantyre.

3 Categorization of business sizes was done by the researcher and is not an official means of identification.

Therefore, because responses from these interviews tended to focus on infrastructure issues of transport, the overall survey responses tend to be weighted towards such issues.

2.2. Interview Schedule Table 1– Interview Schedule

Date Sector Products/Services Employees 6-Nov Agro-processing Vinegar, sauces, and honey 200 6-Nov Tourism Hotel and conferencing 70 7-Nov Chamber of Commerce 9-Nov Wood/Timber Plywood, palettes, and furniture 100 10-Nov Agro-processing Cotton ginnery 150 10-Nov Garment/Textiles Clothing for export 2300 10-Nov Tourism Hotel and restaurant 50 10-Nov Manufacturing Soaps and detergents 500 11-Nov Pharmaceutical Pharmaceuticals and detergents 150 11-Nov Agro-processing Fortified foods and poultry feed 1500 11-Nov Trading/Sales Computer and office products 25 12-Nov Local organization specializing in low-cost cookers 12-Nov Former Chairman of Food Processors Association 13-Nov Director, Malawi Investment Promotion Agency 14-Nov Local community development organization 17-Nov Tourism Hotel and restaurant 16 17-Nov Agro-processing Dairy production 200 17-Nov Automotive Automobile sales and spare parts 70 17-Nov Food Bakery 115 18-Nov Wood/Timber Plywood, furniture and doors 90 18-Nov Garment/Textiles Clothing for export 200 18-Nov Food Fast food/family restaurant 75 20-Nov Tourism Hotel and conferencing 220 20-Nov Services Property Management 6 20-Nov Automotive Automobile sales and rental 18 20-Nov Trading Promotion materials 10 20-Nov Automotive Automobile spare parts 8 20-Nov Transport Minibus passenger bus service 25 21-Nov Manufacturing Nails and steel parts 15 Trucking and warehouse services for 22-Nov Transport/Logistics exports 70 Trucking of agricultural export 22-Nov Transport commodities 200 25-Nov Former consultant, UNDP-Malawi

26-Nov Food Restaurant in Blantyre City Center 60 26-Nov Food Restaurant in Blantyre City Center 20 26-Nov Tourism Hotel and restaurant 25 26-Nov Trading/Sales Local hardware store 6 Construction and civil engineering 27-Nov Construction contractor 860 27-Nov Trading Housing/building materials 12 27-Nov Construction Housing construction company 50 28-Nov ESCOM, Distribution division 28-Nov ESCOM, Transmission division 4-Dec Blantyre Water Board

3. RESULTS

Table 2. Greatest Infrastructure Constraint on Businesses in Blantyre Number of Percentage of total respondents respondents Cost and inefficiency of transportation network 12 36 percent Electricity connection and reliability 7 21 percent Security 7 21 percent Telecommunications network 5 15 percent Water shortages 2 6 percent Total number of businesses interviewed 33 100 percent

3.1. Electricity Supply Electricity is a major concern for most businesses in Blantyre. However, there are disproportionately greater challenges for small companies and businesses located on the outskirts of the city due to the high cost of electricity generators and the relative lack of political clout among smaller businesses. In this study, both cost and unreliability of electricity connection ranked as the second largest infrastructure constraint among businesses (along with security concerns).

The Electricity Supply Corporation of Malawi (ESCOM) is the only publicly owned and vertically- integrated power company in the country. It generates, transmits, distributes and retails electricity throughout Malawi, providing an estimated total installed capacity of 304.8 megawatts MW, with over 90 percent generated by hydropower. Access to electricity in Malawi is very low at seven percent of the total population. Industrial and commercial customers consume approximately 60 percent of the total. 4

In interviews with ESCOM, respondents indicated that the “Everything in our hotel is company is simply not able to meet the demand for electricity computerized and we are completely on in Blantyre. In particular, it is unable to meet peak demand in the grid, so during power outages we the morning between 6:00am-12:00pm or peak demand in the have problems with door locks, food storages, lights, etc. I would say that it is evening between 6:00pm-8:00pm. ESCOM also struggles to actually destroying our business.” meet demand during the peak months of the planting season - Hotel owner in Blantyre (September to November). This is the time of the year when large and smallholder farmers need water for irrigation and since water must be pumped up from the Shire River (at 2km below Blantyre), there is greater demand for electricity.

As a result of supply shortages, ESCOM commits itself to a well-known countrywide strategy of loadshedding. Loadshedding is a process of minimizing the amount of electricity of a given area through rationing. In times of loadshedding, different districts in and around Blantyre are informed that they will not have electricity during certain times of the day (usually in the evenings after 5:00pm), up to three days in a week. While loadsheedding impacts both citizens and the private

4 Malawi Investment Promotion Agency (2007). Investor’s Guide to Malawi. www.malawi-invest.net (see footnote on page 18).

sector, ESCOM routinely publishes its weekly loadshedding schedule in both national newspapers, The Daily Times and The Nation, to inform the public in advance. All businesses interviewed for this study were aware of the schedule and recognized that loadshedding is a reality of doing business in Blantyre. Figure 1:

A typical ESCOM announcement for its loadshedding program found in local newspapers5

However, lack of capacity is not the only reason for electricity supply interruptions. Seasonality plays an important role as well. During the rainy season, reservoirs might be full, enabling a hydropower station to have more power. Counterintuitively, however, there are often many more supply shortages in the rainy seasons. “Power shortages create tensions Heavy rains can cause trees to fall into rivers and reservoirs, with customers, because when the power is out, we cannot causing damage to power stations. In addition, there is communicate via email. Since increased siltation of the rivers, which either blocks or destroys international phones calls are equipment. In fact, increased amount of deforestation in expensive, especially for a small Malawi in recent years has caused more siltation and power business, we rely heavily on email for station damage, resulting in more frequent blackouts. Also, business transactions with international customers.” during the dry season – especially during droughts – there is a - Small trader selling goods to South lack of water in the Shire River, lowering ESCOM’s capacity Africa even further and making loadshedding more frequent. As climate change continues to affect Southern and Eastern Africa with more extreme weather patterns, including heavier storms during the wet season and more intense prolonged droughts during the dry season, countries that are heavily dependent on hydropower, like Malawi, will face further power supply challenges.

5 All photos were taken by the author unless otherwise indicated.

Finally, ESCOM, as well as many of the businesses interviewed, reported that frequent theft was yet another underlying cause of electricity supply interruption. The theft of items such as cables is increasingly common and ESCOM often cannot respond effectively (especially if it has a small inventory of the stolen item). Recently, ESCOM launched a joint countrywide sensitization program with the police to try to respond more effectively to theft. The program provides rewards to people who help catch thieves through a confidential and toll-free hotline. Witnesses or people who have information regarding the incidents are more likely to come forward if they offered a financial incentive. The new program will provide a reward of up to 15 percent of the value of the equipment if a person’s information leads to a recovery. This program aims to deter theft and create a sense of community ownership over public goods, in order to minimize electricity supply interruptions.

The research shows that businesses in Blantyre experience an average of 12.45 supply disruptions per month each lasting an average of 2.39 hours. This amounts to approximately 30 hours of disruptions per month. However, the lost productivity is actually much greater, as many companies run their backup generators for additional hours to avoid potentially detrimental electrical fluctuations. Despite having generators, one dairy processor estimated that his business loses at least one percent of productivity due to electricity outages, while a local bakery estimated losing about 1.5 percent in productivity. If businesses do not own generators, the productivity losses are even greater. In addition, it was found that supply interruptions occur between two and five times more frequently for businesses on the outskirts of town, (i.e. not located directly in the city center or in a designated industrial zone such as Mapanga or Chilimba).

Establishing a Connection New businesses face many hurdles when trying to establish a power connection. For new businesses that need a connection to the electricity grid, ESCOM must install a meter on the premises. Factories require a 3-phase meter for higher levels of electricity use. For non-commercial/residential buildings, ESCOM installs single-phase meters. Many businesses supported by the Malawi Investment Promotion Agency (MIPA) noted that ESCOM is often out of stock of 3-phase meters and that the procurement time to restock can take a long time. As a result, businesses responded that they waited an average of one month to get connected to the grid. However, there are some outliers. For instance, one restaurant owner interviewed stated that he waited four months to receive a connection from ESCOM.

The connection delays are directly linked to ESCOM’s procurement process. ESCOM is under- resourced and often runs out of stock of parts that must be imported from South Africa and other countries. In addition, ESCOM outsourced its parts procurement to locally “connected” businesses for many years until a regulation was passed that mandated that all ESCOM procurement had to be subjected to public tender. However, a tender process can be lengthy and inconsistent, and further delay the connection process.

Finally, if a business is not already connected to the grid, then there is the (obvious) added cost of establishing a connection. ESCOM demands some form of capital contribution from businesses that are not connected to the grid, especially those located on the outskirts of the city (i.e. at greater distances from a switchboard). In particular, if a business is able to pay for some parts up front, especially expensive parts such as transformers and switch gears, then the connection can happen much quicker. However, the Blantyre and Limbe businesses interviewed for this study estimated that they paid between 1.5 - 2 million kwacha ($10,000-$15,000) to connect to the grid. ESCOM reimburses all businesses for the costs of these parts, although some owners mentioned that this

process can be lengthy, and connection costs must be written off as expenses. For a large company that is expanding its business, such an upfront cost is manageable; however for small and medium- sized enterprises (SMEs), this can be a prohibitively expensive. As a result, these smaller businesses have no choice but to wait for their connection, and sometimes this wait is so long that the business never gets established, and much-needed employment opportunities are lost.

It was repeatedly mentioned that if a business has close ties to ESCOM management or is willing to pay a sufficient bribe to the proper civil servants, the connection process could be expedited. However, it is often the case that SMEs have neither the political nor financial capital to engage in such a transaction.

Cost The average amount paid to ESCOM each month for electricity varies drastically by size and type of business. For example, a mid-sized hotel in town pays 60,000 - 75,000 kwacha ($400 - $500) per month; a 100-person timber processing plant pays 200,000 - 250,000 kwacha ($1,300 - $1,700); an auto parts store spends 450,000 kwacha ($3,000); and a large bakery pays 900,000 kwacha ($6,000).

The table below shows the 2007 ESCOM tariff structure:

Table 3: ESCOM Tariff Structure

Malawi Monthly electricity rates Kwacha US Dollars6 For the supply to residential premises 90.94 $0.66 Fixed charge 1.94 $0.01 For each unit consumed up to 30 units 2.85 $0.02 For each unit consumed in excess of 30 units and less than 750 units and less than 750 units 2.85 $0.02 For each unit consumed in excess of 750 units 4.05 $0.13

The supply to non-residential premises Fixed charge for single phase supply 298.19 $2.17 Fixed charge for three phase supply 415.66 $3.03 For each unit consumed 5.35 $0.04

For three phases supply to a consumer Fixed charge 1100.50 $8.02 For each unit consumed 2.98 $0.02 On peak maximum demand charge, per kVA 701.07 $5.11

For the supply to a consumer with a chargeable maximum of 40 kVA or more supplied at 11 kV or 33 kV Fixed charge 1061.11 $7.73 For each unit consumed 2.39 $0.02 Off peak maximum demand charge, per kWh 655.24 $4.77

Source: 2007 Investor's Guide to Malawi. Malawi Investment Promotion Agency (MIPA).

6 Conversion rate: 1 US Dollar (USD) = 137.269 Malawi Kwacha (MWK). www.oanda.com. (December 2007).

In 2006, a mandatory prepaid facility was established, requiring that a person or business must buy electricity units upfront. Under the previous program, ESCOM had difficulty recovering its money. Businesses would rent space in a location with many other businesses and pay rent and a service charge that covered electricity, water and parking. Before the prepaid system, an individual would receive a bill charging consumption plus a 17.5 percent surtax, as well as the previous month’s balance. ESCOM found that it could not retrieve arrears and so it created a system prohibiting businesses from carrying debts. Instead, all bills are pre-paid, eliminating the need to check meters, thus reducing costs.

There is, however, some controversy regarding the peak pricing method. Under this scheme, businesses are required to declare how much kilovolt amperes (kVA) they want to use, which ESCOM provides at maximum constant supply. However, even if a business uses only 75 percent of this reserved amount, for example, it will be charged the full amount based on the rationale that power was not diverted to another business or home. This peak energy usage billing system has come under a lot of scrutiny by customers, who feel such pricing is unfair since they can be charged for electricity they do not use. Therefore, the new system tries to find a middle ground. Instead, businesses pay a percentage of the electricity that they reserve but do not use. This system encourages businesses to demand only what they will actually use.

Coping Mechanisms When disruptions occurred, 58 percent (19/33) of businesses relied on diesel-powered generators for full or partial generation. However, there was only one business with less than 30 employees that had a generator, while 79 percent (11/14) of the business that did not have generators had less than 30 employees. As a result, it is clear that the high price of a generator is prohibitive for smaller businesses and negatively impacts productivity. Some smaller companies were forced to close during extended power outages; smaller restaurants that lacked generators stopped serving customers after nightfall; and one store would switch to hand written receipts if cash registers ceased to function.

Businesses quoted a variety of prices for generators of different capacities. For example, one owner purchased a 167 KW generator for $20,000 while a second owner purchased a 45 KW generator for $15,000. A smaller 5 KW generator imported from India cost between $600 and $700. Locally purchased generators in Blantyre are more expensive and, while cheaper models can be purchased abroad, they are faced with import tariffs.

Only one new business had considered solar panels for their business as a coping mechanism to the electricity interruptions and costs of connection. This agri-business is in the process of expanding its facilities on a piece of land on the outskirts of the city. Since the business is not located near the grid and because ESCOM required that it purchase a transformer, management decided to study the feasibility of solar power for their plant. A cost-benefit analysis revealed that solar panels would be more affordable than paying upfront connection costs, and that an investment could be recovered within two years. As land on the outskirts of Limbe continues to be developed, usage of solar panels could become a more viable option in the coming years.

Recent Improvements/Ongoing Projects ESCOM has several projects planned that could greatly improve electricity reliability and capacity in the coming years. The projected peak demand for 2010, 2015, and 2020 is 324.9 MW, 478 MW and

757 MW, respectively.7 As Blantyre continues to grow, there is a great need to ensure that political will and financial resources are mobilized to ensure that these projects are completed.

A) Mozambique-Malawi Interconnection Project The most ambitious ESCOM project is a $55 million project to connect Malawi to the Southern African Power Pool (SAPP) via Mozambique. SAPP was established through the Southern African Development Community (SADC) to co-ordinate the interconnection of regional power grids.

In July 2007, the World Bank approved a $48 million loan to finance the project after the completion of an environmental impact assessment. Presently, ESCOM is waiting for government approval to begin the project. In particular, there are ongoing discussions regarding the reliance on foreign governments for electricity. If approved, the project will take approximately 2 years to complete.

While the project might produce a capacity of 300 MW, there is no guarantee that the Malawian Government will be able to negotiate this amount, and more modest projections estimate that only 50-100 MW can be obtained from the project. In addition, while the 2010 Soccer World Cup in South Africa could bring some tourism and investment to Malawi, there is concern that much of SAPP’s power generation will be diverted to South Africa for preparations for the event.

B) Phase Two of the Blantyre Network Rehabilitation Program Phase One of the Government-initiated Network Rehabilitation Program was completed in 2007, and included improving the capacity of the Blantyre grid by adding additional transformers. ESCOM is seeking funding for Phase Two, which consists of three main components: (1) adding more transformers, (2) extending lines to load centers, and (3) adding more switch gears to ease overall load.8 The project would generate 64 MW of electricity and is expected to help meet demand for the next three years.

C) Lower Fufu Falls Project The African Development Bank has indicated that it will fund a feasibility study by the Malawi Energy Regulatory Authority (MERA) to potentially build a hydroelectric power plant in Lower Fufu Falls. The study will be completed by the end of 2009. Once construction begins, the plant will take three years to build and will help meet increased demand following the upgrades to Phase Two.

3.2. Other Energy Options Supply The main liquid fuels used for commercial purposes in Blantyre are light and industrial diesel, which are used mainly to power generators during power outages. All 20 businesses with generators use diesel fuel, and spend an average of 10-15 percent of their monthly electricity costs on it. Petrol is mainly used by businesses to transport managers and supervisors by car, while transporters are dependent on diesel for their trucks. They are often forced to link their costs (and inevitably their profit margins) to the price of diesel.

7 Investor’s Guide to Malawi. Pg 15. 8 Interview with ESCOM officials, 2008.

In addition to diesel fuel, businesses also use biomass to meet energy needs. In particular, wood fuel and charcoal are utilized for boilers and cooking. A large agro-processor estimated that the company spends about one percent of its energy expenses on wood.

Cost In December 2008, diesel fuel was being sold at petrol stations in Blantyre for 234.50 kwacha ($1.61 US)/Liter and selling at 225.57 kwacha ($1.54)/Liter wholesale. These prices stayed relatively stable during the last few months of 2008. In December of 2008, petrol was selling at 251.20 kwacha ($1.73 US)/Liter.

Spending on diesel and wood varied significantly depending on the type of industry and size of business. A large clothing manufacturer spends 40,000 kwacha ($267)/day on diesel; a large restaurant in the city center spends 8,000 kwacha ($53)/day; and a timber plant spends 35,000 kwacha ($240)/month. The timber plants use their own scraps to run wood-burning boilers, and therefore do not account for it directly, while a large agro-processor spends an estimated 45,000 kwacha ($300)/month on wood.

3.3. Water Source The Blantyre Water Board receives its water from the Shire River, which is located 2km south of Blantyre city center. All of the businesses interviewed for this study receive water from the Blantyre Water Board. Several businesses, including a trucking company and three agro-processors, also have at least one water facility located outside of Blantyre that does not have access to piped water. Monthly costs vary depending on the type of business. For example, two different hotels both spend about 100,000 kwacha ($667)/month, while an agro-processor spends 300,000 kwacha ($2,000)/month.

Much of Blantyre’s aging water infrastructure is nearly 40 years old. In fact, many areas of the city often do not receive constant water supply because of broken or inadequate pipes. However, the Blantyre Water Board states that the city simply does not have the capacity to meet present demand due to leakage and old meters. As a result, Water Board officials state that a large percentage of water is being wasted and that there is urgent need for investment in this sector.

Figure 2:

Water must be pumped from the Shire River, located 2km below Blantyre.

Quality Most businesses (91 percent of interviewees) felt that the quality of the water in Blantyre was good; however, these same businesses are using water for general cleaning and cooling purposes (and not for drinking). One pharmaceutical company stated that it de-mineralizes all of its water for use in manufacturing generic drugs. To do so, it purchased a de-mineralizing plant from India for $25,000. The clothing manufacturer triple refines its water using a small on-site water filtration plant which was purchased for 500,000 kwacha ($3,330). One agro-processor stated that it plans to invest in a water filtration system to be able to meet United States Food and Drug Administration standards and export to the US market.

Cost Several businesses commented on the high cost of their monthly water bills. In particular, respondents believed that they were being overcharged either because of poor meters, leakage due to old pipes, or inaccurate meter readings by the city. In fact, the Blantyre Water Board confirmed that there is a problem with old and damaged meters that can lead to inaccurate readings. Businesses also face higher water bills due to Blantyre’s elevation, since water must be pumped up from the Shire River at a higher cost. The Water Board states that electricity accounts for 50 percent of its operational costs. Generally, rates in Blantyre are higher than in Lilongwe, as illustrated below:

Table 4: Water Tariffs in Blantyre and Lilongwe Malawi Water Tariff Kwacha US Dollars9 Lilongwe Residential First 10 cubic meters (per cubic meter) 28.60 $ 0.21 Next 30 cubic meters 43.38 $ 0.32 Thereafter 61.25 $ 0.45

9 Conversion rate: 1 US Dollar (USD) = 137.269 Malawi Kwacha (MWK). www.oanda.com. (December 2007.)

Minimum charge 286.70 $ 2.09

Institutional Flat Rate 54.64 $ 0.40 Minimum charge 563.00 $ 4.10

Commercial and Industry First 100 cubic meter 61.25 $ 0.45 Thereafter 76.78 $ 0.56 Minimum charge 603.75 $ 4.40

Central Region Water Board Flat rate 19.80 $ 0.14 Minimum charge 200.00 $ 1.46

Blantyre For the first 10 cubic meters or part thereof 260.00 $ 1.89 Between 10 cubic meters and 40 cubic meters 52.00 $ 0.38 Exceeding 40 cubic meters 60.00 $ 0.44 Source: 2007 Investors Guide to Malawi.

The Blantyre Water Board is not able to recover the costs of its operations, and does not have surplus funds to reinvest in infrastructure upgrading. The Board states that between 2000 and 2005, its monthly bill to ESCOM increased from kwacha 15 million to kwacha 35 million, representing a 133 percent increase in operational costs over the 5-year period. Because access to water is considered to be a human right by many, Parliament did not raise tariffs on water during this period. As a result, the Blantyre Water Board is heavily subsidized and faces severe funding constraints to make necessary improvements. To this end, the agency seeks aid from foreign donors and private investors.

Supply Interruptions and Coping Strategies Water supply interruptions are a serious problem in Blantyre. This study found that the average business faced water interruptions at least seven days a month, with each interruption lasting an average of six hours. However, four businesses stated that they did not face any interruptions because of their coping strategies, namely using boreholes and/or storage tanks. In fact, some businesses pump water from their boreholes to storage tanks to ensure a constant supply of water at all times. Boreholes cost an average of $5,000 - $8,000 to set up, whereas a storage tank of 1000 L costs $500 - $600 and pumps cost about $800.

Despite being illegal, 33 percent (11/33) of the businesses interviewed use at least one borehole. Most businesses claim that because of frequent supply interruptions, they are forced to construct boreholes to maintain productivity. Several businesses suggested that the city makes boreholes illegal to earn revenue from them. However, according to the Blantyre Water Board, boreholes are illegal for safety reasons, since this water is not tested by the city. The city has a running list of businesses that have illegal boreholes and sometimes it cuts off water supply to these entities as a warning (although it does not fine them). A construction firm stated that because the practice is so commonplace, independent drillers will freely come to a business or home and set up a borehole. As

a result, boreholes are used by many businesses throughout Blantyre and Limbe as a coping strategy to deal with water supply interruptions.

The respondents mentioned two other possible coping strategies for water supply interruptions. A transport company based outside the city that does not receive piped water uses a tanker (purchased for $12,000) that it drives into town to fill up several times a week. In addition, two businesses – a small hotel and a large agro-processor - showed a great deal of interest in experimenting with rainwater harvesting. However, neither of the companies had actually invested in such a system, and none of the respondents were aware of rainwater harvesting being used by any other commercial entity in Malawi.

Current and Future Water Infrastructure Projects The Blantyre Water Board is working with donors on a number of projects:

The EU/EIB Water Facility Upgrading Project The EU has allocated €14 million to construct new system pumps at pump stations throughout the city to replace many of the city’s old pipes. 50 percent of the project is being financed as a loan and 50 percent as a grant. The project also intends to pipe water through the poorer urban neighborhoods of Blantyre that currently do not have water. However, there is an €8 million financing gap for this portion of the project, and the Blantyre Water Board is seeking additional funding. A service contractor will manage the project, with a tender expected to be awarded in September 2009 and construction beginning in early 2010. The EU Water Facility upgrading project will help to meet city water demand until 2012, after which time the city will need to use additional sources.

World Bank Feasibility Study Since so much of the Water Board’s operational costs are due to the high electricity costs used to pump water to Blantyre from the Shire River, the city is seeking alternative water sources. To this end, the World Bank has allocated funding for a comprehensive feasibility study. The public tender for this study will be awarded in 2009. It is believed that the study will target the watersheds of Mt. Mulanje and Zomba. Both these sites are situated at elevations above Blantyre, allowing for water to flow into the city and neighboring farmlands. Such projects could drastically reduce water costs and expand water capacity, as well as reduce the strain on ESCOM to pump water.

3.4. Waste Disposal Wastewater Aside from the two large beverage companies, wastewater treatment was of little concern to the respondents. Of the 33 businesses interviewed for this study, three utilize septic tanks, one dumps wastewater on its premises, and thirty drain water into the public sewage system. One agro- processor and one hotel mentioned that their management teams were considering installing a grey- water system on their facilities. None of the businesses mentioned the need to have any required pre-treatment before feeding industrial effluent into municipal systems.

Solid Waste The Blantyre City Assembly is mandated to collect trash from businesses throughout the greater Blantyre area two to three times a week. However, facilities on the outskirts of the city do not have access to garbage collection and instead burn or bury their refuse. Several businesses also stated that

they would like trash to be collected more frequently. The City Assembly states that it has an insufficient supply of trucks, and is unable to pick up trash on a regular basis. One large hotel mentioned that because of the large quantity of solid waste that accumulates weekly on site, a special arrangement has been made with the City Assembly to have trash collected daily, at a cost of 30,000 kwacha ($200) per month. Also, three businesses use septic tanks to store solid waste and pay between 10,000 kwacha - 30,000 kwacha (approximately $65 – $200) to have the city clean them each month.

Recycling There is very little evidence of recycling in Malawi. There appears to be no stringent environmental demands placed on the private sector and very few businesses engage in activities related to recycling. Some automobile and spare parts dealers are involved in the lucrative scrap metal business, which uses recycled auto parts. The pharmaceutical company also reuses poorly processed pills by crushing and reprocessing them. Both timber manufacturers interviewed recycle their sawdust by donating it to local communities (many low-income households use sawdust for cooking). Finally, several businesses mentioned that paper processors in town collect waste paper for recycling. However, in general, there are very few recycling activities in Blantyre and ample opportunities to expand wastepaper recycling, plastic recycling, and other waste-to-energy facilities that reuse solid waste. While the Blantyre City Assembly could engage in such activities with proper financing, there are also opportunities for private sector involvement in such industries.

3.5. Telecommunications “Blantyre has the best infrastructure in the country, but still there is a lot that needs to be done. There must be regulation – not necessarily control, but regulation. Government must support a market economy, new investments and private sector development, but it must also assure that services actually meet the demand and expectations of individual customers and businesses. This is most clearly noted in the telecommunications sector.” - Representative from the Blantyre Chamber of Commerce

Main form of Communication Blantyre’s unreliable and expensive telecommunications network was ranked as the third most significant infrastructure constraint among businesses in Blantyre. Many businesses have access to both landlines and mobile phones, but the majority of users found the mobile service to be more efficient and convenient for business purposes. Half of the businesses surveyed use mobile phones as their main form of communication. However, many businesses expressed concern over the fact that the Government has allowed the expansion of cell phone providers to lead to the over- subscription of customers and poor service. Businesses applaud the expansion of choice and competition in the cell phone market, but would also like to see the Government ensure higher quality and standards

Businesses did not express frustration with the amount of time it takes to establish a mobile, landline or internet connection. Mobile connections can be established the same day. Landline connections can be difficult to establish in rural areas and new industrial development sites, but businesses located in Blantyre and Limbe on average receive a landline connection within one to two days.

Chart 3 – Main Form of Business Communication

Source: Author

Mobile: Over the past ten years, the telecommunications sector in Malawi has rapidly expanded, though cell phone usage is still infrequent compared to other African countries. The number of active connections is less than one million people, or about seven percent of the population. The monopoly held by the Government-owned cellular operator Telecom Networks Malawi (TNM) ended in 2001, when the private carrier Celtel Malawi entered the market (though it was recently acquired by the Kuwait-based Zain Group). TNM’s market share is said to be approximately 40 percent, while Zain controls 60 percent.10

Landline: While landline service is significantly cheaper than mobile service, businesses prefer to use mobile phones due to the unreliability of landlines. Malawi has one landline service provider, Malawi Telecommunications Ltd (MTL). The main complaint against the landline service was frequent theft of cables leading to service interruptions. Three businesses mentioned that landline service became so unreliable that they were forced to switch to mobile service – a more expensive but reliable telecommunications option.

Malawi’s telecommunication sector could see increased competition in the near future. The Government of Malawi is awarding a license to a third mobile operator. In addition, in 2007 the Malawi Communications Regulatory Authority (MACRA) awarded a second fixed-line license to Access Communications Limited, a consortium of African investors. Malawi is expected to have at least three mobile and two fixed line operators in the next few years.11

Internet: As with cell phones, internet usage also continues to expand in Malawi, particularly among businesses with international suppliers or customers. There are several companies providing web- hosting, web-mail, and wireless services in Malawi including Malawi Net, Globe Internet, Skyband Corporation and MTL-Liberty. Internet service providers (ISPs) have also begun to offer new types of services, such as Wi-Fi hotspots, around Blantyre, Lilongwe and major tourist areas. Due to the

10 Nakagawa, Sawa et. al (2009). Foreign Direct Investment in Blantyre: Opportunities and Challenges (Draft). Report prepared for the Millennium Cities Initiative and the School of International and Public Affairs, (New York: Columbia University). March 2009. 11 Ibid.

increased demand for broadband services, the ISPs have reached a bottleneck due to the lack of capital and access to bandwidth.12

Despite the increased interest and usage of the internet in Malawi, only 42 percent of businesses use internet regularly. This is mainly because many domestic suppliers and customers, particularly those located outside of Blantyre and Lilongwe, do not have access to the internet. In addition, frequent electricity supply interruptions, particularly during the rainy season, can cause inconsistent email access. For many small and large businesses, this has strained relationships with international customers. Therefore, a number of requirements – more bandwidth, faster internet connectivity, expanded internet coverage in rural and peri-urban areas, an increased international customer base, and more reliable electricity supply – are needed for the internet to become more widely used by businesses in Blantyre.

Costs The costs of telecommunications vary drastically by the size and type of business. Respondents generally felt that monthly mobile phone bills were expensive, while landline and internet bills were more manageable. Further, because internet and mobile phone prices have decreased in recent years, many businesses supported the introduction of additional competition in the telecommunications sector to increase efficiency and lower costs further. For example, a timber company spends 40,000 kwacha ($250) for mobile phone for three managers (about $150/month per manager), while a transport company spends 500,000 kwacha ($3000) for its 7-person management team (nearly $430/month per manager). Most businesses with an internet connection had an established unlimited connection with either Globe or Skyband and paid about 5,000 kwacha ($35) for the connection set-up and between 13,000 kwacha ($85) and 15,000 kwacha ($100) per month for usage.

Coping Mechanisms To cope with the costs of mobile phone service and the unreliability of landlines, most businesses in Blantyre use both. This is a burden and frustration for many businesspeople. In addition, with over- subscription of both mobile service providers, connections are often not available. As a result, 94 percent of all businesses interviewed carried two mobile phones (one with TNM and one with Zain service) or had a mobile phone with a replaceable SIM card feature so that a phone or card could be switched if one service provider was temporarily unavailable. Such a coping strategy was found to be particularly effective among transport companies that must be in constant contact with their fleets, since some parts of Malawi are only covered by one mobile phone provider.

In addition, two companies interviewed – a construction company and a transport company — use a creative mechanism to cope with telecommunication costs and unreliability: they operate internal 2-way radios (walkie-talkies) to communicate with each other. In fact, the transport company’s system has service as far as Johannesburg, allowing them to easily and affordably talk with their South African colleagues, while only paying an initial one-time fee of 30,000 kwacha ($200) to set up.

12 Ibid.

3.6. Transportation “Malawi spends over $200 million on transport to import and export because of its unique landlocked situation. These transport costs eat up about 60 percent of the value of the country’s exports.” - Malawi Trade and Investors 2007 Quarterly Magazine

The cost and inefficiency of transporting goods is the largest infrastructure constraint for businesses in Blantyre. As a landlocked country, Malawi is faced with high transport costs that can increase the price of moving goods across borders by an average of 30 - 60 percent. This is a serious obstacle to trade. There is a great need to reduce the cost and time of transport of goods to and from Malawi to ensure that local industries (a majority of whom have branches or are headquartered in Blantyre) can compete at the international level.

42 percent of all respondents ranked transport as either the first or second greatest infrastructure constraint to business in Blantyre. Of the twelve businesses that ranked transport as the single greatest constraint, both timber companies noted the poor roads to the forests in the rainy season as their major transport problem. The minibus service company highlighted the number of potholes and the need for frequent repair of roads as the main problem. The other nine businesses didn’t necessarily view the transport system of Malawi as a major constraint. Rather, they identified the road, rail, port, and logistics infrastructure of neighboring countries as major transport barriers. Air transport was not mentioned as a significant form of transport. However, seven businesses mentioned the prospect of improving water transport, in particular through the completion of the Shire-Zambezi Waterway River project, as one way to drastically cut transport costs and import/export time.

3.6.a. Ground Transportation The most frequently used ports for importing and exporting goods are Nacala and Beira in Mozambique, followed by Durban in South Africa and Dar es Salaam in Tanzania. While each port has its advantages, each faces a number of infrastructure constraints:

Nacala, Mozambique Malawi maintains a road and a rail system to Nacala, which is the cheapest port to reach for Malawi transporters and approximately 900 km from the Malawi border. However, 36 percent of businesses highlighted the challenges of sending cargo through Nacala. Although the port is conveniently located as a main entry point for Mozambican, Malawian and Zambian goods, it is small and over- crowded. By rail, containers can take up to eight weeks to reach Blantyre from Nacala, and by road, the transport time varies drastically depending on road and vehicle conditions. 50 percent of the road from Nacala to Blantyre remains unpaved, increasing the cost of truck transport by an average of 20 percent. Transport time increases by at least 20 percent during the rainy season for both rail and road due to accidents and delays. There are plans to finish tarring Nacala Road in 2009, which would decrease some of the transport time and cost.

Figure 3: Nacala and Beira Ports

Source: University of California, San Francisco, nurseweb.ucsf.edu

The most frequently cited constraint for businesses that regularly use either the Nacala or Beira port is the lack of transport during the planting season (September – December). During this period, the Government of Malawi often rents most of the country’s available trucks and railcars to import fertilizer and other necessary commodities for farmers. To rent the trucks, the Government will pay transport companies between 30 - 50 percent more than the market price, and as a result, private businesses often cannot afford to rent trucks during this season. In fact, 24 percent of businesses stated that goods have waited at the Nacala or Beira port for up to three months because of insufficient trucks or railcars to transport their goods to Malawi. Such an inefficient and unreliable import/export system can strain a company’s relationship with suppliers and local, regional and international customers.

Beira, Mozambique Beira is the second most frequently used port for businesses in Blantyre. The port is located approximately 800km from the Malawi border. Much like Nacala, Beira is not able to efficiently meet the high volume of goods passing through the port since it also services Zambia, the DRC and Zimbabwe, in addition to Mozambique and Malawi. In fact, the managing director of a large clothing manufacturer mentioned that the transport time for containers from Beira has not improved since he began his business in 1970. In fact, due to infrastructure and bureaucratic hurdles, a container takes an average of four weeks to arrive in Blantyre once it has been released from the port. Another constraint is that larger vessels cannot dock in Beira port due to draft restrictions (water depth), although there are plans to dredge the port.

Finally, the businesspeople surveyed for this study described different forms of corruption and bureaucracy they face when transporting goods from Beira and through Mozambique in general. For example, without a significant bribe or proper connections, several business people mentioned that consignments can remain in Beira for up to 6 - 12 weeks. In addition, transporters mentioned that Mozambican authorities often impose an “escort fee” of at least $200, which often results in another 2 to 3 day delay. Clearing customs in Beira can take an average of 15-20 days more than in Durban, South Africa.

Below is a list of transportation rates from international cities to Blantyre via Nacala and Beira. Prices are in US Dollars:

Table 5: Malawi Transport Costs to Nacala and Beira

2007 Transportation rates per container from point of origin to Blantyre via Nacala and Beira ($US) ORIGIN Via Nacala Via Beira Country City 20' 40' 20' 40' CHINA North Dalien 3,630 6,945 3,705 7,098 Quindao 3,530 6,765 3,605 6,898 Xingang 3,555 6,895 3,630 7,048 CHINA Central Shanghai 3,430 6,645 3,505 6,798 CHINA South Guangzhou 3,390 6,545 3,455 7,168 Xiamen 3,430 6,745 DUBAI 2,734 5,283 2,930 5,708 HONG KONG 2,950 5,680 3,025 5,838 INDIA Mumbai 2,734 5,283 2,930 5,780 Calcutta 3,290 5,680 ITALY Laspezia 3,100 5,283 3,225 6,338 INDONESIA Jakarta 3,075 3,580 3,150 6,188 JAPAN 3,530 6,080 3,650 7,098 SOUTH KOREA Busan 3,100 6,030 3,175 6,138 MALAYSIA Penang 3,100 6,945 3,175 6,238 NWC (Antwerp/Hamburg/Rotterdam) 3,125 5,980 3,155 6,260 PAKISTAN Karachi 2,734 5,980 2,930 5,708 SINGAPORE 2,950 6,130 3,025 5,838 THAILAND Bangkok 3,100 5,283 3,175 6,238 TAIWAN Keelung 2,950 5,680 3,025 5,838 UK (Tilbury/Felixstowe) 3,125 6,130 3,155 6,280 Source: 2007 Investor's Guide to Malawi. Malawi Investment Promotion Agency (MIPA).

Durban, South Africa The port in Durban is larger and more modern and efficient than the ports of Mozambique. However, transport costs are higher due to its greater distance from Blantyre. Durban is located over 2,660km from Blantyre, more than three times the distance of both Beira and Nacala. Once a container arrives in Durban, it can take between 3-10 days to clear customs. However, because there is no pre-clearance needed in South Africa, the process is still a great deal shorter than other African ports along the Indian Ocean. None of the businesses specifically complained about the roads to Durban. In fact, one transport company mentioned that while it can spend up to 20 percent of costs on wear and tear from Nacala and Beira, it only spends five percent on Durban-related expenses because of the good condition of the roads. Further, a recent study found that on average a South African exporter can fill a container for an Indian buyer within 48 hours, whereas a Malawian company can take up to 12 days to complete a similar order.13

The table below shows international transport costs of goods by road from South Africa to Blantyre and Lilongwe. It is clear that South African prices are restrictively high for many businesses in

13 Nakagawa, et al.

Blantyre (especially smaller businesses), despite the obvious advantages of the local infrastructure. A pharmaceutical company explained that it gets all of its raw materials from South Africa, though it can take 45-60 days to arrive at the factory once the order has been placed. The managing director stated that for every $0.50 the company spends on supplies, it must add an additional $0.49 for transport.

Table 6: Malawi Transport Costs to South Africa

International Transportation Costs14 Road tariff rates from Johannesburg to Blantyre and Lilongwe BLANTYRE LILONGWE South African South African Rand US Dollars Rand US Dollars Full loads (break-bulk 28 tons) per load 28,000 $4,121.10 30,000 $4,415.46 1 x 12m container - gross mass 28 tons - net 24 tons 28,000 $4,121.10 30,000 $4,415.46 1 x 6m container (up to 14 tons gross) 14,500 $2,134.14 15,500 $2,281.32

Part loads per 1000kgs or 2CBM whichever yields greater 1,110 $163.37 1,550 $228.13 Minimum per consignment 750 $110.39 950 $139.82 Local collection within 30kms radius from our warehouse per 1000kgs or 2CBM - minimum 1 Ton 265 $39.00 265 $39.00 Documentation per consignment 265 $39.00 265 $39.00 Source: 2007 Investor’s Guide to Malawi. Malawi Investment Promotion Agency (MIPA).

Transport in Blantyre and throughout Malawi The Japanese Government has supported the expansion of the major Blantyre-Limbe road. Despite delays, construction is now underway. Many of the businesses interviewed showed a strong desire to see this project completed in order to reduce transport costs and time. Construction plans for a third lane on the Blantyre-Limbe road may already be in motion.

One former member of the Blantyre Chamber of Commerce took a more cautious position toward the expansion of roads. He stated: “I believe that you cannot just build new roads if you do not maintain the ones that already exist. M1 roads run North-South (for exports). These are the trunk roads or ‘lifeline’ of the country. Feeder roads are the smaller roads. M1 is full of patches, and has outlived its usual 15-year life. However, there is a lot of construction of new feeder roads, while perhaps investment in upgrading M1 should be prioritized.”

There were divergent concerns regarding domestic transport. A small minibus service company stated that an exorbitant amount of its small profit margin on repairs. Most of the rural and peri- urban roads where the company mostly operates are often full of potholes. The owner of a transport company stated that most of the tires on his company’s fleet should last 50,000 km but usually only last 30,000km, a depreciation rate of 40 percent faster than expected. An export trucking company added that during the rainy season, transport from the fields is difficult. The owner provided tea as a specific example. During the dry season, tea can reach domestic warehouses for export within 2-3 days, while during the rainy season it can take 1-2 weeks because dirt roads get washed away. In

14 Conversion rate: 1 US Dollar (USD) = 6.79431 South African Rand (ZAR). www.oanda.com. (December 2007).

addition, two hotels stressed the importance of improving the main roads from Blantyre to nearby national parks in order to attract tourism.

3.6.b. Air Transportation Chileka International Airport in Blantyre has several airlines that fly domestically, regionally and internationally. Air Malawi, the national carrier, is wholly owned by the Government. However, there are discussions of a possible privatization, which could improve efficiency, prices, reliability and customer service. This would appease the business community, which currently has a low approval rating of the airline. Air Malawi flies throughout Southern Africa, with connecting flights to Asia, Europe and the USA via Johannesburg and Nairobi. It flies domestically to all major cities and tourist destinations, and introduced new flights to London and Dubai in 2007. Other airlines servicing Malawi include Ethiopian Airlines, Air Zimbabwe, Kenya Airways, and South African Airways.15

Most of the businesses interviewed in this study mainly use air transport for business travel. Government statistics show that fewer than 2,000 tons of air freight is handled by the Chileka International Airport annually, as most importers and exporters tend to use the road and rail networks that lead to Nacala and Beira.16

3.6.c. Port Access and Rail Rehabilitation Shire-Zambezi Waterway Project: Since the late 1990s, there have been on-going negotiations regarding establishing a new waterway connecting Malawi to the Zambezi River through the Shire River from Nsanje in southern Malawi to the port of Chinde on the Indian Ocean in Mozambique. If fully developed, this waterway would provide Malawi with direct access to the Indian Ocean, facilitating not only Malawi’s imports and exports but also those of neighboring countries, at considerably reduced costs.17

The project would reduce the transport distance of goods to less than 240 km (compared to 800km and 900km to Beira and Nacala, respectively). Malawi would no longer be landlocked. In addition, the project aims to provide Malawi with a transport linkage through the rehabilitation of the rail line from Nsanje through Blantyre to Chipata in Zambia and through Dona Ana to Sena in Mozambique.

The project is estimated to cost nearly $4 billion over a 5-year period. A memorandum of understanding between Mozambique, Zambia and Malawi was signed in April 2007. The European Union produced a pre-feasibility study which is available to potential investors. MIPA has argued that the project could potentially save the three countries $250 million annually.

3.6.d. Urban Transport While most of the working class live outside of Blantyre city center and walk to work, there is an active urban transport system of minibuses and taxis for those who can afford it. Nine percent (3/33) of the businesses stated that they have invested in at least one driver or car service to drive workers home late at night. Twelve percent (4/33) of respondents noted that they make an effort to hire employees that live near the business because of the importance of travel costs and safety.

15 2007 Malawi Investment Guide. Pg 17. 16 Ibid. 17 Ibid.

Because of the recent increase in minibus prices, two business owners justified the provision of car service and raises for their employees. They suggested that workers are more productive if they do not have to walk long distances each day to get to work.

Over the past two years, the Blantyre local government has begun to more strictly enforce traffic rules. This includes fining drivers up to 5,000 kwacha ($35) for driving while talking on a mobile phone, and requiring that minibuses carry a maximum of 14 passengers (instead of the usual 20-25). The Government has declared that the new minibus rule is for the safety of the passengers. However, the significant loss in the number of customers has resulted in minibus companies raising fare prices, significantly burdening workers in Blantyre and Limbe who do not have much expendable income to begin with. As a result, since the fare increase, more workers have begun walking to work.

Table 7: Average Wage Rates in Malawi

Daily Wage (average 26 Monthly Wage days/month) Kwacha US Dollars Kwacha US Dollars Minimum wage for Government employee 3,500.00 $ 24.04 134.62 $0.92 Average wage for casual day laborer in Blantyre/Limbe* 6,000.00 $ 41.21 230.77 $1.59 Average wage for full time factory worker in Blantyre/Limbe* 12,000 ~ 16,5000 $82.42 ~ $113.33 460.00 ~ 635.00 $3.17 ~ $4.36 * Compiled by author during research and does not reflect a formal wage labor study, but general data gathered from businesses.

The table above shows the monthly and daily wage average for government workers, casual day laborers and full-time factory workers in Blantyre. As of December 2008, the cost of one minibus ride was 70 kwacha (~$0.50) each way, or 140 kwacha roundtrip. Since many workers live on the outskirts of Blantyre and work in Limbe, they must take two minibuses to get to work, costing a total of 240 kwacha each day. The table clearly shows that these prices are prohibitively expensive for much of the working population in the area. Also, since there are limited street lights in the peri- urban areas and limited minibus service past 7:00pm, many workers must leave work at 5:00pm in order to walk home before sunset, which discourages managers from demanding that workers stay to work overtime. Most managers can afford minibus service or cars, but for the majority of workers, urban transport is a burden.

3.7. Land A possible constraint for investment in Blantyre is the difficulty in obtaining land for industrial, agricultural and office use. Over one-third of businesses interviewed (12/33) indicated that they own the land on which they operate. The remaining 21 businesses lease or rent land directly from owners.

Land Availability The greater Blantyre region has several industrial areas on the outskirts of the city, including Mapanga and Chilimba, where available land has yet to be developed. The areas are connected to the city’s water, electricity, road and other infrastructure networks. Yet, some of the industrial areas do not have access to sewer lines. In addition, available plots of land in this area are scarce and continue to increase in price every year. Despite this, businesspeople agreed that because space is extremely

limited in Blantyre city center, investing in land outside of the city might be more cost effective for larger agro-processing and industrial projects.

The city maintains a comprehensive management system for dealing with land matters, consisting of policy and legal instruments as well as institutional mechanisms. However, the rapid population growth and urban development of the city, including unplanned settlements, exert enormous pressure on land resources.

Once land has been located, the process of obtaining it can vary depending on the type of business and the level of interest of other parties. For instance, there is a regulation stipulating that to purchase land, foreign investors must advertise the price they are willing to pay in the national newspaper for up to 14 days, and any local Malawian can purchase that land if they have the required capital. The respondents had mixed opinions on this policy. Some local Malawians believe this policy is necessary policy to encourage local investment. However, because the announcement is usually only listed in the newspaper once, many businesses do not learn about the investment opportunity in time to prepare the necessary paperwork. Some foreign businesses criticized the policy because they believe it creates an upward pricing war to ensure that land is obtained, forcing them to pay higher than market prices. The process usually takes two to three months, and all business people interviewed perceived their land to be secure.

Land Prices Land prices differ quite significantly throughout Limbe and Blantyre. An agro-processor based in the Mapanga industrial area on the outskirts of Limbe pays about 375,000 kwacha ($2,500) in rent per month per hectare whereas a small electronics store situated in Blantyre city center pays about $20 per square foot per month. A small hotel in a residential area of Blantyre recently paid 15 million kwacha ($100,000) for a 1.5-hectare property. Finally, a hotel owner suggested that land prices increased in value from 1,000 to 2,000 percent in the past 10 years.

3.8. Security Security concerns along with the cost and reliability of electricity rank as the second biggest infrastructure constraint for businesses in Blantyre. Malawi has been relatively politically stable since its independence in 1964, and the transition from one-party rule to a multi-party democracy has been largely peaceful. The country has not experienced any political instability in recent years. However, security issues and, in particular, theft, continue to be a major problem for both small and large enterprises throughout the country. In fact, because transformers, water meters, and diesel fuel are popular with thieves, security concerns inevitably impact other infrastructure costs of doing business.

42 percent (15/33) of the businesses interviewed stated that they had experienced an incident of recent theft. In these cases, 66 percent of the respondents believed that employees were involved to some degree in the theft. Several people interviewed actually suggested that employees were responsible for as much as 90-95 percent of the petty theft. Also, while 88 percent of businesses interviewed (29/33) had security guards, there were cases of guards working with employees to steal goods from warehouses and other facilities. As a result, many business owners believe that security is a real problem, and that it is simply a reality of doing business in Malawi.

For example, the managing director of a large clothing manufacturer stated that his management team is forced to fire approximately 5-10 of his 2,300 workers daily due to petty theft, and that nearly 30,000 garments (or about one percent of inventory) is stolen from the warehouse every year. Further, transporters mentioned that drivers often steal diesel fuel, but because of a shortage of qualified drivers, they choose not to fire them.18 As a result, many companies budget for a minimum level of theft. Finally, because many employees often use fake identification when applying for jobs (especially in the transport sector), enforcement in the court systems is weak, and bribery of police officers is common. As a result, extended jail time for thieves is rare and theft often goes unpunished.

Security Costs Security costs can be high for businesses in Blantyre. The largest and most popular security company, G4, can charge up to 56,000 kwacha ($375) per month for an alarm button call response system and between 50,000 kwacha ($335) to 100,000 kwacha ($670) per month for one security guard. However, large businesses with G4 services must pay this amount for every warehouse or facility they own, oftentimes spending well over 1 million kwacha ($6,700) per month to secure the business. G4 appears to be the only security company in Blantyre with an insurance policy that allows a business to recover the costs of stolen goods. In addition, to purchase and set up hidden video cameras in warehouses to record activity can cost up to $2,500. Such prices are prohibitively expensive for small businesses. As a result, most businesses hire inexperienced guards without an insurance policy for about 6000 kwacha ($40) to 12,000 kwacha ($80) per month.

Coping Mechanisms The business people interviewed for this study suggested several possible coping mechanisms to deal with theft. The first was to set up a government-sponsored database to keep fingerprints on hand for all security guards. The database would work as a deterrence mechanism against theft. There have been some public discussions about this idea, but no system is in place yet. Second, the managing director of a transport company suggested that drivers should be mandated to complete a nationally-recognized driving course and required to provide more advanced methods of identification, to lower the frequency of false identification. For instance, one transport company has 200 court cases pending against former employees who have stolen items, but because of fake identification, these individuals cannot be tracked. These drivers lie about their residence or purchase a fake driver’s license on the black market. To cope with this recurring issue, the management now demands that drivers provide signed guarantee forms from friends or families, stating that they will be legally responsible for stolen goods. However, the company has found that even these guarantees are hard to enforce. Therefore, one trading company, which has had goods stolen in Mozambique, Zimbabwe and South Africa, suggested establishing a SADC regional police force (similar to Interpol) to police against such theft.

Finally, twelve different businesses acknowledged that there is a link between theft and poverty, and suggested that any management strategy to tackle the issue of theft must consider the possible causal effects of low wages, high living costs and the realities of a desperately poor working class (for more information, see Appendix 6.2).

18 A disproportionately high percentage of the labor force in the transport industry in east and southern Africa have died from HIV/AIDS.

4. OPPORTUNITIES FOR INFRASTRUCTURE INVESTMENT 4.1. Investments in Solar Power As this report has highlighted, the capacity constraints of both ESCOM and the Blantyre Water Board are inextricably linked, resulting in the poor reliability of electricity reaching businesses in the area. As land becomes scarcer in the city and more businesses continue to develop land outside of greater Blantyre, the costs of connecting to the city’s electricity grid will increase. As a result, opportunities exist to expand access to solar power for both urban and rural-based industries in Malawi. However, the industry is stifled by local capacity in manufacturing and the availability of solar power equipment. In fact, none of the businesses interviewed for this study are presently using solar panels, and only four of the businesses (including three hotels) discussed an interest in pursuing solar power research in 2009.

Due to its geographic position, Malawi is a relatively sunny country. One agro-processor building a mill in a rural area outside of Blantyre began investigating solar panels as a possible energy source when ESCOM refused to pay for its connection to the power grid. This company conducted a cost- benefit analysis which found that an investment in solar power is more affordable in the long-term than electricity. Purchasing solar panels allows companies to save money on monthly electricity bills once upfront costs are paid for, over a three- to five-year period. In addition, they help to promote a more environmentally sustainable business, and prevent productivity losses and generator fuel costs associated with frequent power failures. The financial attractiveness of such renewable energy projects can be significantly improved through carbon credits, making them competitive with other forms of power generation, and help to attract local, regional and international investors to such projects.

4.2 Rainwater Harvesting

“In Malawi, despite its potential and the existing infrastructure, rainwater harvesting has not received adequate attention among policy makers, planners and water project engineers or managers. Rainwater harvesting is considered as competing with, rather than [supplementing, the] conventional ground and surface water source. Yet, rainwater harvesting has been shown not only to improve the immediate water situation, but also to improve levels of hygiene, provide water at low costs, increase water security and develop employment opportunities and skills.” - African Technology Policy Studies Network, 200819

Rainwater harvesting refers to the myriad of methods that can be used to gather and store rainwater. It is a process that has been used by urban and rural societies for thousands of years, and there is ample opportunity for investment in this industry in Blantyre. Research shows that rainwater systems are most economical if there is at least 254mm of precipitation in a region in a given year. The southern part of Malawi, with its tropical climate, has an average rainfall of 740mm. The more

19 Mloza-Banda, Henry Raphael (2008). “Research on Small Scale Rainwater Harvesting for Combating Water Deprivation in a Peri-Urban Area of Lilongwe, Malawi." http://www.atpsnet.org/prog/rainwater.html.

central region of the country, with a more moderate climate, receives an average rainfall of 1,500 to 2,000mm annually, making both regions suitable for rainwater harvesting.20

None of the businesses interviewed in this study are using any form of rainwater harvesting. However, the managing directors of an agro-processing business and a local hotel mentioned that their management team has plans to investigate this option in the coming years. Prices vary depending on size, filtration system, pump equipment needed, transport costs and possible tariffs. However, with frequent water interruptions and many businesses already investing in storage tanks and illegal bore holes, there is a clear willingness for businesses to search for innovative coping mechanisms for Blantyre’s water constraints.

Further information can be found through the Southern and Eastern Africa Rainwater Network (http://www.searnet.org/) and the Rainwater Harvesting Association of Malawi – RHAM (P/Bag 149, Lilongwe; [email protected]).

4.3 Low-Cost Biofuel Opportunities Many urban households in the greater Blantyre region are not connected to the electricity grid and still rely on biomass (wood, charcoal) for cooking and heating water. Research by academic institutions, NGOs and innovative environmental technology companies into low-cost environmentally-friendly bio-fuel options and opportunities could significantly reduce fossil fuel requirements, and reduce the emission of harmful substances associated with the burning of fossil fuels. Such projects, including the biofuel stove and lamp projects discussed below, could be subsidized by carbon credits.

The Blantyre infrastructure investment study highlights two possible bio-fuel projects for consideration by interested donors and investors:

BIOFUEL PROJECT 1 – JANEEMO Project Contact Information: Jonah Itai Chimusoro Entech CEO [email protected]

The Macaulay Institute, in collaboration with Climate Futures, Entech and Environment Africa began a 3-year bio-fuels project in October 2008 with a £340,000 grant from the Scottish Government's International Development Programme, in the Lower Shire district of Chikwawa, south of Blantyre.

Three tree species, Jatropha, Neem and Moringa (collectively known as JANEEMO), will be grown by farmers on marginal lands. The trees have multiple uses. Their oil-rich seeds will be processed to produce locally used biofuels for lamps, stoves and generators. The residue from this process will then be used as an agricultural fertilizer. In addition, extracts from the Neem and Moringa trees, which have important nutritional and medicinal uses, will be actively promoted among communities.

A key aim of the JANEEMO project is to ensure self-sustaining enterprises beyond the end of grant funding. Business model options, including micro- and carbon finance, are being evaluated and interested donors and investors are asked to contact the CEO of Entech for further information.

20 AfricaNet. “Malawi Climate,” http://www.tanzaniaodyssey.com/www.africanet.com/africanet/country/malawi/climate.htm.

JANEEMO trees will be grown primarily as living fences and intercropped on marginal land. Good agricultural and harvesting practices will be promoted, avoiding disruption to food crops. The JANEEMO seeds will be pressed and used to develop 'ethical' biofuel, fertilizer and soap. To start, 30 farmers will be trained, and by year three, the project plans to have over 2,000 farmers involved – growing 10,000 JANEEMO trees and producing 2,500 liters of biofuel. Priority will be given to meeting household and village fuel needs, such as for lamps and generators. Hand oil presses, used by individuals for biofuel processing, will be distributed widely. Once household needs are met, construction of village-scale processing plants will allow enterprises to flourish. Over time, each district will establish an 'energy center', including a diesel engine, oil expeller, generator and maize mill, which will be managed by a JANEEMO growers association.

The project is being led by the Macaulay Institute, one of Europe's leading land use research agencies and a major contributor to Scottish Government policy. It has extensive project experience and partnerships with NGOs in Africa for climate change and development initiatives. It is supported in Scotland by Climate Futures, a multidisciplinary carbon management and climate communication agency.

Environment Africa, an NGO, will deliver the project on the ground, including agricultural training for farmers. It will be assisted by Entech, which will ensure oil-pressing equipment is distributed and used correctly. The department of forestry within the Government of Malawi has offered its support, along with many community and village groups. A collaborative link with a permaculture (herb and nutrition) program will further broaden the program.

BIO FUEL PROJECT 2 – BluWave / SuperBlu Biofuel Stoves Contact Information: A Gaffar Jakhura Bluwave Ltd Gift of the Givers Foundation P.O. Box 80006, Chairman of Malawi Country Office Maselema, Blantyre 8 Tel: +265 (0) 1 842 287 / 654 Malawi Mobile: +265 (0) 8 826 417 Tel: +265 (0) 1 642 287 / 873/ 469 Fax: +265 (0) 1 842 782 Fax: +265 (0) 1 642 782 Email: [email protected] Email: [email protected] Web: www.giftofthegivers.org

The SuperBlu Stove (SBS), developed by Bluwave Limited (Malawi) over the last two years, is a specially designed burner that uses ethanol (an alcohol-based fuel) instead of paraffin. The concept of an ethanol-based burner began with the promoter’s search for an affordable and safe substitute for biomass (firewood and charcoal). The SBS looks like a conventional stove but has no consumable parts, such as wicks or mantles. It is designed to be versatile and, in cold conditions, converts into a heater by means of a ceramic cylinder, which fits on top of the stove. The cylinder heats up, retains and radiates the heat to warm the surroundings. On top of the cylinder is a space for a kettle to heat water.

SBS’s fuel consumption is over 5 times more efficient than a standard stove so that, for example, 50 ml of paraffin will burn for about 9 minutes in a standard paraffin stove, whereas SBS will burn for 45 minutes or more using the equivalent amount of ethanol. More importantly, SBS reaches burn temperatures of 700oC to 800oC compared with paraffin equivalent which burns at up to 450oC. The combined effect makes SBS up to 13 times more efficient, and therefore proportionately cheaper to run, than the standard paraffin stove.

These results are achieved by means of the burner and combustion chamber that effectively converts ethanol into gas which burns at nearly the calorific efficiency of methane gas. Ethanol is easy to produce relative to gas, while being much safer to handle, store and use. In addition, there are no noxious or unpleasant fumes or emissions since the SBS burner emits water vapor and carbon dioxide in the natural and stable state in which they are already found in the atmosphere. Hence, the products are suited for use indoors, unlike wood-based fuels. There is also no residue or waste produced when burning ethanol, thereby reducing the negative environmental impact.

The Gift of the Givers Foundation, a local humanitarian and development NGO based in Blantyre, has been supporting Bluwave research for several years. However, to be commercially viable and to be able to expand production and outreach to low-income communities throughout Malawi, further investment is needed. Interested donors and investors should contact Bluwave Ltd or the Gift of the Givers Foundation for more details about the viability

and research behind the product, a free informational CD about the product, and information about investment and partnership opportunities.

4.4 Plastics Recycling Plant While most businesses mentioned that the garbage collection system in Blantyre operates in a relatively efficient manner, very few businesses mentioned any engaging in recycling. In fact, while spare auto parts are recycled and some wastepaper is reprocessed in town, there are few governmental recycling rules and no large-scale private sector companies involved in the recycling industry. The study highlights possible investments in plastics recycling.

Most plastics in Malawi are imported and therefore investors are already beginning to see the opportunity to produce plastics locally. In addition, as a country with many fresh water resources, Malawi is an attractive investment for mineral water bottling. In fact, MIPA has begun to attract investment into this industry, and there has been an increase in the water bottle market. As a result, plastic bottle waste is expected to increase as well. Other areas of local plastic manufacturing include toothbrushes, house wares, furniture, shoes, as well as materials for the construction industry. With an ever-increasing amount of plastic products being thrown away each year, particularly in urban areas, there are ample investment opportunities for the plastics recycling industry.

This study identified one particular small business – Lakeland Ltd (a subsidiary of Rab Processors) - that is looking for start-up capital for a plastics recycling plant. The innovative social mission, employment generation model, and environmental focus make the project an attractive investment opportunity for both donors and socially responsible commercial investors.

LAKELAND LTD. PLASTIC RECYCLING FACILITY Contact Information: Ahmed Sunka Tel: +265 (0) 1 845 200 / 13 Marketing & Communications Executive Direct: +265 (0) 1 842 441 Address: PO Box 5338, Limbe, Malawi Cell: +265 (0) 8 844 411 Email: [email protected]; Web: www.rabmw.com Fax: +265 (0) 1 844 927

Initial Start-up capital needed: $100,000

Vision: To create the first for-profit plastic recycling facility in Malawi that provides a livelihood for marginalized urban communities in Blantyre, while reducing the city’s environmental footprint by producing low-cost recyclable products targeting the rural poor.

Rationales: Rational (1) – Environmental: Expand plastics recycling facilities in Blantyre, by investing in machinery that converts plastics into black sheeting (polypropylene sheets) to be used by smallholder farmers and the rural poor to put under their thatched roofs during the rainy season.

Rationale (2) – Social - targeting poor urban input suppliers: There are hundreds of street children, homeless and destitute people in urban centers such as Blantyre that are in need of income generating activities to survive. Many of these people are the same ones that are looking in garbage bins and trash sites for food or other products that they could use, pick up or potentially sell. The recycling project plans to work with local community organizations to create a grassroots social movement that can mobilize these people to support a plastic recycling campaign that buys plastic bottles and other plastic materials from the poor who collect them.

Rationale (3) Social - targeting poor / BOP rural customers: The recycling collection will be used and converted to polypropylene sheets – and the end products will be black sheeting mainly used by smallholder tobacco farmers and the rural population to cover their roofs during the rainy season. The poor in rural areas are already purchasing imported black sheeting (polypropylene sheets) each year to put under their thatched roofs during the rainy season, and therefore

Lakeland can begin to locally manufacture a much-needed product at a cheaper price. The locally manufactured black sheeting sheets will be affordable and use a base-of-the-pyramid (BOP) marketing, sales, and delivery scheme to target those living on less than a dollar a day, by providing them with an appropriate technology, that itself can be recycled if they tear during or after the rainy season.

In addition, there is a strong safety component in the processing. The product is being reprocessed into a thin plastic sheet that will not be used again for fuel or liquid consumption. The processor will clean the plastic, and because phyto- sanitary standards do not necessarily apply since the sheeting is only a temporary roof covering, the safety concerns that other recyclable products face is not present in such a project.

Rational 4) A profitable social venture that can act as a catalyst: While a non-profit model for a recycling facility that targets street children and beggars has advantages, Lakeland Ltd. believes that a financially sustainable model will allow the venture to generate more income for more poor people, by ensuring that there is a profit-driven cost-recovery mechanism built into the company’s operation. Also, by demonstrating to the business community of Blantyre that recycling facilities can be profitable, the project can act as a catalyst to encourage other entrepreneurs to begin investing in similar industries.

4.5 Waste-To-Energy Project It is estimated that the average household produces enough waste to meet all of its energy requirements.21 A number of major waste streams exist, each with a number of potential technologies, including municipal solid waste such as landfill gas to energy, and gasification and mechanical biological treatment, among others. All of these solutions involve a significant upgrade in the sanitary condition of municipal disposal sites. In addition, wastewater, through biogas reactors, gasification, and other projects which target the development of wastewater treatment facilities, can significantly improve the sanitation of city sewerage systems.22 There is ample opportunity to work with the Blantyre City Assembly and other city and national authorities to invest in various waste-to-energy projects.

In particular, this study highlights one innovative refuse waste project that plans to harness methane gas as way to fuel public transport systems in Blantyre and Limbe:

REFUSE WASTE DERIVED METHANE AS A VEHICLE FUEL IN THE CITY OF BLANTYRE Contact Information: Jonah Itai Chimusoro Entech CEO [email protected]

Motivation Note Methane is responsible for nearly as much global warming as all other non-CO2 greenhouse gases put together. Methane is 21 times more powerful a greenhouse gas than CO2. While atmospheric concentrations of CO2 have risen by about 31 percent since pre-industrial times, methane concentrations have more than doubled. Whereas human sources of CO2 amount to just three percent of natural emissions, human sources produce one and a half times as much methane as all natural sources.

Millions of cubic meters of methane in the form of swamp gas or biogas are produced every year by the decomposition of organic matter, both animal and vegetable. It is almost identical to the natural gas pumped out of the ground by the oil companies and used by many of us for heating our houses and cooking our meals.

21South Pole: Carbon Asset Management Ltd. “Questionnaire for evaluating CDM opportunities in Africa’s Millennium Cities.” Pg 4. 22Ibid.

1. Aim of the Project The aim of the project will be the purification of the biogas produced by the sludge treatment plant in Blantyre – Malawi and its subsequent utilization as a fuel in public transport in the Limbe-Blantyre area. After purification, the gas will be compressed to 350 bars to be used in the modified diesel engines of municipal buses.

2. Introduction The purpose of the project will be the development of appropriate technologies for the conversion of mini buses so that they can run on methane produced by the sewage biogas plant. The fuel gas will have good energy, with efficiency at costs comparable to current fuel prices, and the project should result in significantly less air pollution generated by public transport services, and provide youth employment, a reduction of methane released into the air and huge savings on foreign exchange.

The objective will be to purify 10 m3 per day of biogas produced in the wastewater treatment market as a substitute for 600 liters of vehicle fuel. The modification of the diesel engines to operate on purified biogas (98 percent dry methane free of H2S) allows also the utilization of natural gas, which means that it can be used in case there is a problem with the production and supply of the purified biogas. The project was initiated by the consortium of BEE KIND, a Malawian NGO, Entech and the Blantyre Council. Several other companies are expected to join and their expertise will complete all technical aspects of the project. Interested donors and investors are strongly encouraged to contact Entech for more information on investment opportunities.

3. Technical Description The project is based on environmental issues identified in the Malawi National Environmental Action Plan, including Human Habitant degradation, air pollution and climate change. The unit will be designed to comply with environmental constraints, and the methane loss during the scrubbing will be negligible (0.2 percent). The specially designed alloy tanks will be built to cover such possible events as fire or criminal acts.

4. Performance of the Purification Plant & the Buses Exhaust gases emitted by the gas fuelled buses will be much lower than those of fossil fuels. It is expected that continued innovation on several aspects of the project will result in a significant reduction in gas consumption due to the following reasons:

1. Improved energy-efficiency through the development and improvement of gas purification technology,

2. Reduced weight of the on-board storage gas tanks with the introduction of composite materials. These developments will further improve the energy balance, environmental performance and overall economic viability.

4.6 Ministry of Industry 2008 Project Summaries for Potential Investors

In mid-2008, the Ministry of Industry and Trade published a brief guide of various opportunities in the Malawian economy for potential investors. The Blantyre region infrastructure projects listed in the guide are summarized below. The list highlights opportunities in the transport, energy and ICT sectors and aims to attract long-term investment from interested donors and commercial investors.

Table 8: Government of Malawi - Ministry of Industry and Trade 2008 Infrastructure Summaries for Potential Investors

Transport, Aviation & Core Infrastructure Projects Est. Value Contact Project Economic Project (US $ Current Collaboration Person/ Project Name Project Description Location Sector Promoter Millions) Project Stage Status Sought Address Air Transport Purchase of aircraft for Lilongwe, Transport Ministry of 12 Commencement Waiting for Public-Private Director of Services provision of air transport Blantyre, Transport investment Partnership Planning services Mzumu

Detailed Vessel Operating Operation of vessels on Lake Lake Ministry of information Information Public-Private Ministry of and Management Malawi for passengers and cargo Malawi Transport Transport 15 available available Partnership Transport Detailed Ministry of Rehabilitation of Rehabilitation and expansion of Chileka, Ministry of information Feasibility Public-Private Transport - Chileka Airport infrastructure at Chileka Airport Blantyre Transport Transport 25 available study done Partnership Lilongwe Rehabilitation and management of the Malawi side of the Sena Railway line linking Mawali and Detailed Sena Railway Mozambique to the Indian Southern Ministry of information Feasibility Public-Private Ministry of Line Ocean port of Beira Malawi Transport Transport 30 available study done Partnership Transport Shire-Zambezi Purchase of vessels, river Nsanje Transport Ministry of 80 Feasibility Study Feasibility Public-Private Director of Waterway barges/sea going vessels Transport study in Partnership Planning Project progress

Source: Government of Malawi. Ministry of Industry and Trade. Project Summaries. 2008.

Table 9: Government of Malawi - Ministry of Industry and Trade 2008 Infrastructure Summaries for Potential Investors (Continued)

Est. Value Contact Project Economic Project (US $ Current Collaboration Person / Project Name Project Description Location Sector Promoter Millions) Project Stage Status Sought Address Energy Projects Kholombidzo Detailed Ministry of Hydro Power Southern Department information Feasibility Energy & (Lower) Hydropower generation Malawi Energy of Energy 312 available study done Equity / Loan Mines Kholombidzo Detailed Ministry of Hydro Power Southern Department information Feasibility Energy & (Higher) Hydropower generation Malawi Energy of Energy 330 available study done Equity / Loan Mines ICT Projects Depart. of Depart. of Info. Info. Systems Systems and Mobile Virtual and Tech. Tech. Network Operating of a 4th mobile Management Feasibility Management Operators Company in Malawi Blantyre ICT Services 10 Study Services Telecommunicati Depart. of Depart. of Info. on Network Info. Systems Systems and Infrastructure and Tech. Tech. and Signal Telecommunication Management Feasibility Information Management Distribution infrastructure provision Blantyre ICT Services 25 Study done available Services Depart. of Depart. of Info. Info. Systems Systems and Installation/expansion of new and Tech. Tech. Fiber Optics fiber optic cable with Management Information Feasibility Management Networks connectivity to other countries Blantyre ICT Services 40 available Study done Services Source: Government of Malawi. Ministry of Industry and Trade. Project Summaries. 2008.

5. CONCLUSION

As the industrial capital of Malawi, Blantyre is a very attractive location for investment. Safe, politically stable, resource-endowed and blessed with great tourist potential, Blantyre offers investors many possibilities for investment. However, this working paper has highlighted some of the infrastructure constraints of doing business that must be addressed if Malawi is to be internationally competitive. There are numerous transport, electricity, security and telecommunications concerns to be addressed. The particular regulatory, financial, logistical and competitive limitations faced by smaller and medium-sized enterprises should also receive particular attention. Finally, investment in human capital and social sectors must complement any infrastructure investment to ensure a skilled workforce and support Blantyre’s emerging private sector.

6. APPENDICES 1. Infrastructure Survey

1. Basic Information What types of products/services do you provide?

How many employees do you have?

What general sector does the business fall under:

2. Electricity 2.1. Current options Are you currently connected to the electricity grid? Do you have your own resources of electricity such as a generator? What is your current monthly electricity demand in watts or kilowatts?

2.2 Quality of supply and Does the supply keep within the limits of the promised frequency? How interruptions and vendor frequently is supply interrupted (number of times per week or month)? response How long do service interruptions last?

2.3 Coping strategies What strategies do you use to cope with low quality supply and supply interruptions (generators, closing down, etc.)? Describe type of back-up power supply and equipment. What are the costs associated with back-up power for your business?

2.4. Cost Do you have a special agreement with the supplier? What is the rate structure?

2.5. Time to establish a Describe how the connection was established and how long it took. What connection was the contribution of the consumer to establishing the connection?

3. Other Energy Options 3.1 Current Options Describe your current non-electricity energy mix (liquid fuels, gases, biomass, etc.) and the services provided by each energy source (i.e. heating/cooling, powering machinery and appliances, cooking, etc.). Describe your current consumption of each energy option (i.e. liters/month). If supplies increased, what would be your peak demand for each fuel? 3.2 Quality of supply and Does the supply keep up with your current demand? How reliable is the interruptions and vendor supply? How frequently is supply interrupted? response 3.3 Coping strategies What strategies do you use to cope with low quality supply and supply interruptions?

3.4. Cost Describe the prices and taxes for each energy source. Do you have a special agreement with the supplier(s)? What is the cost structure? How is

the payment arranged? Do the rates seem fair? How have prices changed in the last 1, 5, and 10 years?

4. Water 4.1. Source Describe your current source of water. Where does the water come from (groundwater, reservoir, etc.)? How far away is the source from your facilities?

4.2. Supply interruptions How frequently is supply interrupted? How long do service interruptions and vendor response last? Which form of communication is established with the supplier in case of interruptions? Is there any fallback available?

4.3. Quantity How much water is typically consumed for business purposes in liters/week or month (irrigation, toilets, cooking, livestock, machinery, etc.)?

4.4. Quality What is your perception of the quality of the water? Have you taken any steps to test the water? Does your firm treat or process water for any purpose? If so, please describe.

4.5. Coping strategies What strategies do you use to cope with supply interruptions?

4.6. Cost What is the rate structure? How is the payment arranged? Do the rates seem fair?

4.7. Seasonality Is there substantial season-to-season variation in quality or reliability of water supply? To what extent is rainwater used for industrial purpose?

5. Wastewater 5.1. Structure of How does your firm dispose of wastewater? Have you outsourced the wastewater treatment wastewater treatment?

5.2. Capacity to handle What pre-treatment is required prior to feeding industrial effluent into industrial effluent municipal systems?

5.3. Regulatory Describe your interactions with the authorities responsible for wastewater environment treatment.

5.4. Cost Describe the cost for wastewater treatment.

6. Telecommunication 6.1. Time to establish Does your business rely upon landline or mobile telephone? Describe landline connection how the connection was established and how long it took.

6.2. Cost structure Describe the installation and utilization cost both for landline and cellular connections (local, in-country and calls outside the country). Include also fax services.

6.3. Internet services Does your business have access to the internet? Describe the providers and connection options. What is the rate structure? What is the method of connection (dial-up, landline broadband, Wi-Fi, satellite)?

6.4. internet connection What is the typical connection speed? Do connection speeds inhibit use? speeds How frequently is connection interrupted?

7. Solid waste 7.1. Availability of solid What methods are used to dispose of waste (i.e. incineration)? Is there a waste disposal service recycling system (informal, formal) established? Is there any quality management in place? Have you outsourced the solid waste disposal?

7.2. Cost Describe the rate structure for disposal. 7.3. Industrial waste What kinds of services and facilities, if any, are available to handle industrial waste?

8.1a Roads Does the condition of the roads hinder your ability to either receive or ship goods? How much do road conditions add to your business – both in man-hours and money?

8.2. Urban transit How do workers arrive to work? In your perception, is the state of the transport system a barrier to worker productivity? Have you established your own service to bring workers to the plant? Do you own the direct access road to your plant?

8.3. Main statistical Miles of paved road/1000 people (urban area only), miles of paved indicators road/1000 people (state or province)

9. Air transport 9.1. Availability Does your business make use of air for transporting people or goods?

9.2. Frequency of use? If so, how often?

9.3. Cost How much do you pay for air transport on a monthly basis? How have air transport costs changed over the last 5, 10 years?

9.4. Reasons for non-use If not, why don’t you make use of air transport?

10. International freight 10.1. Availability Describe the options that your firm regularly considers: Rail? Port? Air

freight?

10.2. Cost What is the cost to transport a container to a major European port? What is the preferred method? What is the transit time?

10.3. Storage Are warehouses, including bonded warehouses, and storages, including cold storages, available? Describe how access to storage facilities, including refrigeration, impedes your business.

11. Access to land 11.1. Tenure Does your firm own the land where it does business? If not, why? If so, do you perceive your tenure to be secure? How much did you pay for the land per acre (or hectare)?

11.2. Availability If you wanted to expand operations, is there a sufficient supply of affordable land available to meet expansion needs? How long would it take you to obtain additional land?

11.3. Zoning Are there zoning restrictions that limit what you can do on your site?

12. Security 12.1. Major considerations Are there security considerations that significantly affect your business?

12.2. Defensive measures What measures does your firm customarily take to ensure the security of its facilities?

12.3 Cost What are the costs associated with securing your facilities?

13. General Of all the categories we discussed today, which causes the greatest constraint to your business?

2. Poverty and Theft

Malawi is one of the poorest countries in Africa, with an average wage that is significantly lower than many of its neighboring countries and comparable to many of the low-cost labor centers of Asia. With a stable political system and an abundance of natural resources, Malawi’s cheap workforce adds to its attractiveness. However, as living costs, and oil and food prices have increased in recent years, most Malawians, even those working in stable government or industrial manufacturing jobs, have had difficulty meeting the basic needs of their families. Some business owners in Blantyre recognize such realities and believe there is a correlation between poverty and the increase in employee theft in recent years.

Table 10: Comparative Monthly Compensation for Malawi and its Neighbors

Source: 2007 Investment Guide to Malawi.

Table 11 below shows the standard cost of living per month for most working class Malawians against the average wage. The table shows that the average cost of living (excluding health, school fees, etc.) has gone up by nearly 12 percent in the last year, and that even a skilled laborer getting paid nearly four times the minimum government wage struggles to earn enough money to cover two-thirds of his or her family’s daily expenses. For example, in 2008 an average Malawian family of four living on the outskirts of Blantyre needed to earn 1,063 kwacha ($7.09) per day to cover daily expenses. However, unskilled casual day laborers earn about 230 kwacha ($1.59) per day and full- time factory workers earn on average 635 kwacha ($4.36) per day. These low wages, which are still significantly higher than the minimum wage, do not cover family expenses.

The local agro-processor factory manager that compiled the research for this table presented his findings at a company board meeting, and used it to justify a wage increase. Many of the Blantyre business people that were interviewed spoke about the link between theft and poverty and expressed that they are often sympathetic to their workers’ struggles. As a result, many of these managers try to create more inclusive working environments that properly compensate workers, while maintaining strong security measures.

In addition, the study revealed that many businesses (particularly those owned by Asians and Malawians of Asian descent) do not employ ethnically black Malawians as managers. Some respondents expressed that this creates a lack of ownership or responsibility towards these business among Malawians, which can result in increased rates of theft. Consequently, one restaurant owner described a successful human resource management strategy he employs to limit theft and create

proper incentives. Under his transparent merit-based system, staff are promoted, paid higher wages than many other restaurants and given health benefits and education credits. His system has led to a drastic reduction in theft, he claims.

Table 11: Average Monthly Cost of Living in Blantyre

Standard Average Cost of Living per Month (Kwacha) **

2007 2008

Consumables Quantity / (Groceries) Month Cost / Unit Amount Cost / Unit Amount Beef ration - 1kg 4 478.00 1,912.00 478.00 1,912.00 Bread flour - 1kg 2 290.00 580.00 290.00 580.00 Bread white standard 15 70.00 1,050.00 70.00 1,050.00 Chicken / unit 2 400.00 800.00 800.00 1,600.00 Covo cooking oil 500 ml 2 306.00 612.00 306.00 612.00 Dried beans 4 120.00 480.00 180.00 720.00 Eggs / unit 3 170.00 510.00 170.00 510.00 Floor polish 1 490.00 490.00 490.00 490.00 Lifebuoy hand soap 4 33.00 132.00 33.00 132.00 Maluwa laundry soap 4 13.00 52.00 13.00 52.00 Margarine 3 130.00 390.00 200.00 600.00 Powdered milk 2 695.00 1,390.00 895.00 1,790.00 Rice / kg 2 165.00 330.00 598.00 1,196.00 Salt 1kg 2 83.00 166.00 83.00 166.00 Shoe polish - 100gm 1 278.00 278.00 278.00 278.00 Sugar - 1kg 4 109.00 436.00 130.00 520.00 Surf washing powder - Standard size 4 50.00 200.00 50.00 200.00 Tea 250gms 1 145.00 145.00 430.00 430.00 Tooth paste 1 222.00 222.00 222.00 222.00 Ufa maize meal - 20kg 2 2,550.00 5,100.00 2,550.00 5,100.00 Vaseline - 425g 1 399.00 399.00 399.00 399.00 Vim dishwashing soap 3 47.00 141.00 47.00 141.00

Total Per month (consumables) 15,815.00 18,700.00

Rent 3,500.00 3,500.00 Electricity / (Firewood and candles) 1,000.00 1,000.00 Water 800.00 800.00 Roundtrip bus fare trips / 26 (avg 6 days 140 (70 140 (70 each month * of work/wk) each way) 3,640.00 way) 3,640.00 Cost per month (other items) 8,940.00 8,940.00 Total / month 24,755.00 27,640.00 Average family wage needed per day to meet basic needs 952.12 1,063.08

Source: Compiled by local factory manager as research for company's yearly wage analysis. * Bus fare is optional. Those outside the city do not use buses but some of those in the city will use two buses a day. ** This index does not include other needs like medicine, school fees, and social responsibilities (weddings, funerals).

Table 12: Average Wage Rates in Malawi

Monthly Wage Daily Wage (avg 26 days/month) Kwacha US Dollars Kwacha US Dollars Minimum wage for government employee 3,500.00 $ 24.04 134.62 $0.92 Average wage for casual day laborer in Blantyre/Limbe* 6,000.00 $ 41.21 230.77 $1.59 Average wage for full time factory worker in Blantyre/Limbe* 12,000 ~ 16,5000 $82.42 ~ $113.33 460.00 ~ 635.00 $3.17 ~ $4.36 * Compiled by author during research and does not reflect a formal wage labor study, but general data gathered from businesses.

7. References

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Baker, Ginger (2008). Assessing Infrastructure Constraints on Business Activity in Kumasi, Ghana. (New York: Columbia University). http://www.earth.columbia.edu/mci/?page=news#WPS_Infrastructure.

Economist Intelligence Unit (2007). Country Report: Malawi, www.eiu.com.

Fekete, Paul, et. al. (February 2004). Malawi Integrated Framework: Diagnostic Trade Integration Study, Volume I. (Lilongwe: The World Bank Group).

Lahmeyer International (July 2005). Mozambique-Malawi Interconnection Project: Feasibility Study Report. (Lilongwe: Electricity Supply Corporation of Malawi).

Malawi Investment Promotion Agency (2007). Investor’s Guide to Malawi. www.malawi-invest.net.

Malawi Investment Promotion Agency (2008). Report Summaries – Ministry of Trade and Industry. www.malawi-invest.net.

Malawi Investment Promotion Agency (Vol. 3 No. 1. 2007). Trade & Investors: Quarterly Magazine for Business Partners in Malawi. www.malawi-invest.net.

Malawi Investment Promotion Agency (Vol. 4 No. 1. 2008). Trade & Investors: Quarterly Magazine for Business Partners in Malawi. www.malawi-invest.net.

Malawi National Statistics Office (2006). Statistical Yearbook 2006, Chapter 2: Population, http://www.nso.malawi.net/data_on_line/general/yearbook/yearbook_2006/yearbook_2006.html.

Mloza-Banda, Henry Raphael (2008). “Research on Small Scale Rainwater Harvesting for Combating Water Deprivation in a Peri-Urban Area of Lilongwe, Malawi." www.atpsnet.org/prog/rainwater.html.

Nakagawa, Sawa, et al. (2009). Foreign Direct Investment in Blantyre: Opportunities and Challenges (Draft). Report prepared for the Millennium Cities Initiative and the School of International and Public Affairs, (New York: Columbia University). February 2009.

Norconsult (March 1996). Lower Fufu Hydropower Project Pre-Feasibility Study: Final Report Volume I Technical/Economic Aspects. (Lilongwe: Electricity Supply Corporation of Malawi).

UN-HABITAT (September 2003). Sustainable Cities Programme: Blantyre & Lilongwe. http://ww2.unhabitat.org/programmes/sustainablecities/documents/lilongwe.pdf.

United Nations Development Programme (2008). Human Development Report – Malawi. http://hdrstats.undp.org.

World Bank (2008). Malawi: World Bank Country Brief. (Washington: The World Bank Group). www.worldbank.org.

World Bank (2008). Malawi - Doing Business 2009. (Washington: The World Bank Group). http://www.doingbusiness.org.

MCI AND VCC WORKING PAPER SERIES ON INVESTMENT IN THE MILLENNIUM CITIES

No 07/2009

FOREIGN DIRECT INVESTMENT IN BLANTYRE, MALAWI: OPPORTUNITIES AND CHALLENGES

Sawa Nakagawa Abhinav Bahl Meron Demisse Megumi Ishizuka Francisco Miranda Frank Ramirez Kwi Young Sung

APRIL 2009

432 Park Avenue, 13th Floor, New York, NY10016, United States Phone: +1-646-884-7422; Fax: +1-212-548-5720 Websites: www.earth.columbia.edu/mci; www.vcc.columbia.edu

MCI and VCC Working Paper Series No 07/2009

A separate MCI working papers series on the social sector is also available.

For more information, please refer to the MCI website at: http://www.earth.columbia.edu/mci/ and the Vale Columbia Center website at: http://www.vcc.columbia.edu/.

Table of Contents

Table of Contents...... 3 Acknowledgements ...... 5 Table of Figures ...... 6 Acronyms and Abbreviations ...... 7 Currency and Units ...... 8 Executive Summary ...... 9 Introduction ...... 9 I. Mandate and Investment Evaluation Framework ...... 11 1. Mandate ...... 11 2. Methodology ...... 11 II. Blantyre City Overview ...... 14 Blantyre City Snapshot ...... 14 Blantyre City Economic Profile ...... 15 Blantyre City Political Profile ...... 16 III. Industry Assessments ...... 17 1. Cotton and Textiles Industry Analysis ...... 17 Industry Overview ...... 17 Value Chain Analysis ...... 18 Sub-sector Analysis: Cotton/Textiles/Garments ...... 18 Opportunities ...... 21 Constraints ...... 22 Impact and Feasibility Assessment ...... 23 2. Cassava Industry Analysis ...... 23 Industry Overview ...... 23 Value Chain Analysis ...... 26 Sub-Sector Analysis: Cassava Processing ...... 27 Opportunities ...... 27 Constraints ...... 28 Impact and Feasibility Assessment ...... 28 3. Pigeon Pea Industry Analysis ...... 30 Industry Overview ...... 30 Value Chain Analysis ...... 31 Sub-Sector Analysis: Pigeon Pea Processing ...... 31 Opportunities ...... 31 Constraints ...... 32 Impact and Feasibility Assessment ...... 32 4. Chili Industry Analysis ...... 33 Industry Overview ...... 33 Value Chain Analysis ...... 35 Sub-sector Analysis: Chili Processing ...... 35 Opportunities ...... 36 Constraints ...... 36 Impact and Feasibility Assessment ...... 37 5. Groundnuts Industry Analysis ...... 38 Industry Overview ...... 38 Value Chain Analysis ...... 39 Sub-Sector Analysis: Groundnuts Processing ...... 39 Opportunities ...... 40 Constraints ...... 41 Impact and Feasibility Assessment ...... 41 6. Macadamia Nuts Industry Analysis ...... 42 Industry Overview ...... 42

Value Chain Analysis ...... 43 Sub-Sector Analysis: Macadamia Nuts Processing ...... 43 Opportunities ...... 43 Constraints ...... 44 Impact and Feasibility Assessment ...... 44 IV. Conclusion and Recommendations ...... 46 Identify Investors ...... 46 Advocate for the Alleviation of Supply-side Bottlenecks ...... 47 Support Institutional Capacity Building of the Key FDI Institutions ...... 47 Establish Stronger Linkages between MVP and MCI ...... 47 Encourage Partnerships with Development Agencies and NGOs ...... 47 Appendix I. Sectors with Limited Investment Potential ...... 48 1. Banking Industry Analysis ...... 48 Industry Overview ...... 48 Opportunities ...... 48 Constraints ...... 48 2. Coffee Industry Analysis ...... 49 Industry Overview ...... 49 Value chain ...... 50 Opportunity ...... 50 Constraints ...... 51 3. Dairy Industry Analysis ...... 51 Industry Overview ...... 51 Value Chain ...... 52 Opportunity ...... 53 Constraints ...... 53 4. Tea Industry Analysis ...... 54 Industry Overview ...... 54 Opportunity ...... 57 Constraints ...... 57 5. Telecommunications Industry Analysis ...... 57 Industry Overview ...... 57 Opportunity ...... 59 Constraints ...... 59 6. Tourism Industry Analysis ...... 59 Industry Overview ...... 59 Opportunity ...... 61 Constraints ...... 61 Appendix II. Foreign Direct Investment in Malawi ...... 62 Appendix III. Investment Climate/ Opportunities/ Constraints ...... 64 Investment Climate ...... 64 Opportunities ...... 64 Constraints ...... 65 Appendix IV. Bibliography ...... 68

Acknowledgements The authors would like to express their gratitude to many individuals and organizations who shared their time, resources and enthusiasm with us over the past twelve months.

First, we would like to recognize the significant contributions of Sawa Nakagawa throughout the editing process and publication of the document. In addition, we would like to thank Dr. Susan Blaustein, Mr. James Geisel, Dr. Karl Sauvant, and Mr. Joerg Simon of the Millennium Cities Initiative at The Earth Institute for their strong commitment to this project and for providing their expertise throughout the process of writing the working paper. We are particularly grateful to our advisor Dr. Alex Awiti, Professor Eugenia McGill, and Professor Jackie Klopp from the School of International and Public Affairs at Columbia University for their encouragement and expert assistance and guidance. We also thank Zachary Arney, Paola Kim Blanco and Paulo Cunha for their editing assistance.

In Malawi, we are indebted to Mr. John Chome and numerous government officials at the Blantyre City Assembly. They supported us in arranging key interviews during our field visits and were extraordinary hosts.

Finally, we want to recognize and thank all the entrepreneurs and representatives of organizations who generously agreed to be interviewed for this project. We are extremely thankful for their kindness and commitment in providing us with critical information for our research.

FDI in Blantyre Page 5 Table of Figures

Figure 1: Investment Evaluation Framework ...... 11 Figure 2: Map of Malawi ...... 14 Figure 3: Blantyre City Snapshot...... 15 Figure 4: Exports to the United States ...... 17 Figure 5: Cotton Hectarage and Production (2006-2007 Estimates) ...... 19 Figure 6: Malawi's Main Exports by Value (2000-2006) ...... 19 Figure 7: Cotton Area, Yield, and Production Trends (1985 – 2007) ...... 20 Figure 8: Global Cassava Production ...... 24 Figure 9: Cassava Production in Comparison to Other Crops in Malawi ...... 25 Figure 10: Pigeon Pea World Production (in tons) ...... 30 Figure 11: Production Supply of Pigeon Peas in Malawi ...... 31 Figure 12: Chili Production Trend in Malawi...... 34 Figure 13: 2005 Malawian Commodity Price Comparison (US$/ton) ...... 34 Figure 14: Blantyre Chili Production Estimates ...... 35 Figure 15: Blantyre Groundnuts Production Estimates 2002-2003 to 2006-2007 ...... 39 Figure 16: Linkages with the Millennium Village Project ...... 41 Figure 17: World Macadamia Nut Production and Exports ...... 42 Figure 18: Number of Licensed Institutions in Malawi ...... 49 Figure 19: Interest Rates ...... 49 Figure 20: Milk Production Estimates ...... 52 Figure 21: Milk Consumption per Capita in Malawi (kg) ...... 52 Figure 22: World and Malawi Tea Price Trends ...... 55 Figure 23: Largest Affiliates of Foreign Transnational Companies in Malawi, 2004 ...... 62 Figure 24: Malawi’s “Doing Business” Report Ranking, 2008 ...... 64

FDI in Blantyre Page 6 Acronyms and Abbreviations

ADMC Agricultural Development and Marketing Corporation ACDI/VOCA Agricultural Cooperative Development International Volunteers in Overseas Cooperative Assistance AGOA African Growth and Opportunity Act BASFA Balaka Area Smallholder Farmers’ Association CAMAL Coffee Association of Malawi CBD Central Business District CDA Cotton Development Association CMV Cassava Mosaic Virus COMESA Common Market for Eastern and Southern Africa DFID Department for International Development ELISA Enzyme-linked Immunosorbent Assay EPD Economic and Political Development EPM Eastern Produce Malawi EPZ Export Processing Zone Act EU European Union FAO Food and Agriculture Organization FDA Food and Drug Administration FDI Foreign Direct Investment GPM Groundnut Pigeon Pea Multiplication GSB Growing Sustainable Business HIV/AIDS Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome ICRISAT International Crops Research Institute for the Semi-Arid Tropics ISP Internet Service Provider HPLC High Performance Liquid Chromatography MACRA Malawi Communications Regulatory Authority MASH Malawi Association of Spice and Herbs MBGs Milk Bulking Groups MBS Malawi Bureau Standard MCI Millennium Cities Initiative MDI Malawi Dairy Industries MDGs Millennium Development Goals MGDS Malawi Government Development Strategies MIPA Malawi Investment Promotion Agency MMM Malawi Milk Marketing MoAFS Ministry of Agriculture and Food Security MRFC Malawi Rural Finance Company Limited MSAs Milk Shed Areas MTL Malawi Telecommunications Limited MVP Millennium Villages Project NGO Non-Governmental Organization NASFAM National Smallholder’s Farmer’s Association Malawi NASDEC NASFAM Development Corporation NASSCENT NASFAM Centre for Development Support NASCOMEX NASFAM Commodity Marketing Exchange NSO National Statistics Office NORAD Norwegian Agency for Development Cooperation NSSD National Strategy for Sustainable Development

FDI in Blantyre Page 7 OIBM Opportunity and Investment Bank of Malawi RBM Reserve Bank of Malawi SADP Smallholder Agribusiness Development Project SARRNET South African Root Crops Research Network SCFT Smallholder Coffee Farmers Trust SHMPA Southern Highlands Milk Producers Association SIPA School of International and Public Affairs SME Small and Medium-sized Enterprise TNM Telecom Networks Malawi UNDCF United Nations Capital Development Fund UNDP United Nations Development Program UK United Kingdom US United States of America USAID United States Agency for International Development WSSD World Summit on Sustainable Development ZISFA Zikometso Smallholder Farmers Association

Currency and Units

MK Malawi Kwacha (1 US Dollar = 137 MK, as of February 1, 2009)1 US$ US Dollar

°F Fahrenheit °C Celsius Ha Hectare (1 ha = 10,000 square meters) Kg Kilogram (1 kg = 2.2 pounds) mm Millimeter (1/25 inch) m³ Cubic meters ppb Parts per billion

1 Oanda.com. http://www.oanda.com

FDI in Blantyre Page 8 Executive Summary Introduction In 2006, the Earth Institute at Columbia University launched the Millennium Cities Initiative (MCI), an urban counterpart to the Millennium Villages Project (MVP), to assist nine mid-sized cities across sub- Saharan Africa in achieving the Millennium Development Goals (MDGs). MCI provides research and policy analysis in order to attract foreign direct investment (FDI) to the cities. Increased FDI flows can help to create employment opportunities and foster local enterprise development and sustainable economic growth. In addition, MCI is helping the Millennium Cities to carry out needs assessments in a number of social sectors. The data from these assessments will enable MCI to generate integrated City Development Strategies to help each city meet the MDGs.

Currently, the principal destination for FDI in Malawi is agriculture, most notably in tobacco and sugar. According to the World Investment Report 2007, Malawi had US$30 million of FDI inflow in 2006, compared to only US$7 million in 2003. Major sectors of investment in addition to agriculture include telecommunications, manufacturing, tourism, and mining. The bulk of FDI inflows come from the UK, the US, and South Africa.

Malawi has been relatively politically stable since its independence in 1964. Moreover, the transition from one-party rule to a multi-party democracy has been largely peaceful. The Government encourages both domestic and foreign investors to establish and own business enterprises in most sectors of the economy. Furthermore, Malawi is party to numerous multilateral and regional trade agreements including the Common Market for Eastern and Southern Africa (COMESA), Southern African Development Community (SADC), the US African Growth and Opportunities Act (AGOA), and the Cotonou Agreement/Everything But Arms (EBA) Initiative. Additionally, bilateral trade agreements exist with South Africa, Zimbabwe and Mozambique, and a customs agreement with Botswana. A number of tax incentives in Malawi are enshrined in the main tax legislation that includes the Customs and Excise Act, the Income Tax Act and the Export Processing Zones (EPZ) Act.

While Malawi's investment climate has been strengthened during the last decade, the country is still facing a number of major challenges. In addition to its landlocked position, which can result in high transport costs of more than 30 percent of the country’s total import bill, Malawi’s poor power and water infrastructure also impedes the attraction of investment. In 2004, companies on average suffered power disruption of 50 days, compared to 48 days in Tanzania and 15 days in Zambia. In addition, interest rates are among the highest in Africa. According to the IMF, the 2009-projected lending rate is 25.0%, compared to 13.5% in South Africa. The cost of finance is a major obstacle for firms in Malawi.2 Malawi ranked 118th (out of 180 countries) in the 2007 Transparency International Corruption Perceptions Index. To address this issue, President Bingu Wa Mutharika has made the fight against corruption a top priority.

Using information gathered from literature reviews and the first field visit, the authors assessed investment opportunities across eleven industries: cassava, chili, coffee, pigeon pea, cotton, macadamia nuts, tea, diary, banking, telecom, and tourism.

Using the investment evaluation framework described in Section I, the authors identified the textile manufacturing sector as having considerable investment potential, distinguished by higher impact and feasibility. Investment in this sector is expected to have high positive impacts on employment and productivity, as well as high feasibility measured by demand, supply, enabling market and profitability factors. Currently, garment producers in Malawi are uniquely positioned to benefit from the preferential

2 Economist Intelligence Unit. EIU DataServices. https://eiu.bvdep.com/frame.html.

FDI in Blantyre Page 9 access granted by AGOA. A requirement for locally or regionally sourced raw materials comes into effect in 2012, forcing garment producers to source raw material regionally without a fully developed local textile-manufacturing sector. This will force Malawi to compete with the world's largest garment suppliers on equal ground. Given the lack of textile manufacturing facilities in the country, a significant opportunity exists to invest in textile manufacturing facilities. Investment in this sector would entail a capital investment in an existing company or the establishment of an entirely new textile manufacturing company. Mapeto, the country’s sole textile producer, is looking to expand its weaving capacities. This represents a unique opportunity to investment in the industry at a time when Malawi still enjoys preferential access to international markets. A second alternative is to set up a new company encompassing a vertically-integrated textile-manufacturing operation. Blantyre City is optimally located in either case, since it serves as the headquarters of two of the country's three cotton ginners and most of the garment producers.

In addition to textile manufacturing, which is the sole high feasibility-impact sector, the authors identified five medium feasibility-impact sectors. These investment opportunities include the following agricultural value-added products: cassava processing, pigeon pea processing, chili processing, groundnuts processing and macadamia nut processing.

Analyses of industries with limited investment potential are included in Appendix I. Having identified opportunities for investment, the authors also evaluated constraints hampering the growth of each industry. These constraints are provided in the individual assessment sections.

Considering the aforementioned constraints associated with FDI in general, as well as with individual industries, the authors set forth recommendations for MCI with a view to encouraging FDI in the High Feasibility-Impact sectors and alleviating constraints that hamper growth in these sectors. These recommendations include the following:

• Identify investors for high feasibility-impact sector investment opportunities; • Advocate for the alleviation of supply-side bottlenecks; • Support institutional capacity building of key agencies, such as the Malawi Investment Promotion Agency MIPA, the Malawi Bureau of Standards (MBS) and the Malawi Export Promotion Council (MEPC) MEPC; • Establish stronger linkages between MVP and MCI; • Encourage partnerships with development agencies and NGOs for value-added projects.

FDI in Blantyre Page 10 I. Mandate and Investment Evaluation Framework 1. Mandate The authors were mandated by MCI to focus on the following three objectives:

• To identify viable and feasible investment opportunities in Blantyre; • To assess the various FDI opportunities that create sustainable economic development in Blantyre; • To provide MCI with recommendations on programming priorities, by focusing on the types of FDI that offer deep, positive and sustainable impacts on Blantyre’s development goals. 2. Methodology The key research question to be answered in this working paper is: What viable/feasible investment opportunities exist in the city of Blantyre and which of those can offer sustainable development that can contribute toward the achievement of the MDGs in Malawi? As such, the paper focuses on:

• The analysis of key industries with potential to attract FDI; • An assessment of key industries from two aspects: o The feasibility of FDI in Blantyre, including constraints and opportunities; and o The potential impact of FDI, i.e. the various ways in which different types of FDI can positively contribute to Blantyre’s development plans.

The achievement of the above objectives entailed the successful completion of various sequenced, time- bound activities that were executed within the framework of an established methodology.

Investment Evaluation Framework The authors used an Investment Evaluation Framework to assess the attractiveness of potential investment opportunities. The figure below illustrates this tool. It must be noted that this assessment was not determined from any particular index or quantitative measure of feasibility and impact; the graph merely serves as a visual guide and conceptual framework when evaluating one investment against other.

Figure 1: Investment Evaluation Framework

As such, investments were classified according to two criteria: impact and feasibility. For instance, an investment was catalogued as “high” if it had high scores in both impact and feasibility, whereas

FDI in Blantyre Page 11 “medium” investments scored relatively lower on the composite measures. If an investment was considered highly feasible, yet scored “low” in its potential impact on the development of the country, it was placed in the “low” region. The same principle was followed if the industry scored “high” in impact and “low” in feasibility. The difficulty in comparing different industries, coupled with a dearth of quantitative data, necessitated that this evaluation be qualitative in nature. This is also reflected by the fact that not all factors under feasibility and impact had significant information to be included for all industries.

The Feasibility component of the framework is comprised of the following factors:

Demand Factors • Excess demand - Does demand for the good exceed the available supply? • Demand trend - What does future demand look like? • Price sensitivity - How will changes in the price of the good affect demand?

Supply Factors • Technological requirement - Does the technology for the production of the good exist locally or must it be imported? At what cost? • Supply of qualified labor - Is the available labor qualified for the process? Is training required? • Competitive production cost - Can the good be produced at a competitive cost for the local market? International market? • Industry structure - How many firms operate in the sector? How will this affect operations? • Price sensitivity - How will changes in the price of inputs affect production? • Access to financing - How will access, or the lack thereof, to financing affect operations?

Enabling Environment • Taxes - What are the taxes like for companies in this sector/industry? • Tariffs - How will high trade tariffs affect imports of raw materials and exports of finished goods? • Subsidies - Are there currently any subsidies in this sector/industry that might distort the market? • Trade agreements - Are there any trade agreements that might benefit this sector/industry? How? • Domestic policy - Are there any government policies facilitating investment in the sector/industry? • Infrastructure - How does the existing infrastructure affect the viability of the sector/industry?

Profitability • Payback period - What is the length of time required to recover the cost of an investment, calculated as Cost of Project/Annual Cash Inflow? • Break-even analysis - What is the number of units that must be sold to produce a profit of zero and recover all associated costs?

The Impact component of the framework includes the following factors: • Employment - How much employment will the investment generate? • Technology transfer (skills) - Will this investment improve the skills of the labor force? • Income – Which demographic segment will most benefit from the increase in wages derived from this investment? • Local competitive environment - Does this investment spur competition locally and thus improve efficiency and productivity in the sector/industry? • Linkages - Are there any backward or forward linkages that can be made with other industries? Are there any improvements in value chains?

FDI in Blantyre Page 12 • Spillover effects - What effects will this investment have on other industries or sectors? Will any others benefit? • Infrastructure - Will this investment lead to an improvement in the local infrastructure? • Sustainability - What are the prospects of this investment's sustainability, environmental and otherwise?

FDI in Blantyre Page 13 II. Blantyre City Overview Blantyre City Snapshot Located in the south of Malawi, Blantyre lies on a central transport route and is connected to all parts of the country as well as several neighboring countries. For the purpose of this working paper, the Blantyre region covers the entire southern region except Mangochi and Zomba (see Figure 2). The following southern districts are included: Mwanza, Neno, Blantyre, Chiradzulu, Thyolo, Mulanje and Phalombe.

Figure 2: Map of Malawi Climate/Rainfall The city has a tropical continental climate, with light rainfall common during the cold dry season due to moist maritime air. Temperatures are cool, ranging from an average of 13°C3 in the cold season to 21°C4 during the hottest months, namely September, October and November. The average annual rainfall is 1,122 mm.5

Health The threat of HIV/AIDS in the city is high with an HIV/AIDS prevalence rate of 21 percent in 2005. There is also a significant threat of cholera during annual rainfalls. 6 Due to the poor drainage system, malaria remains a major health concern.7

Water Water supply is accessible to 80 percent of the population. The total capacity of piped water is 86,000m³/day against a total demand of 63,100m³/day. The Blantyre Water Board has difficulty meeting current demand, especially during the dry season. Since Blantyre is located on a hill, the city’s water supply must be pumped uphill through a pumping system that is old and susceptible to frequent breakdowns. These deficiencies, combined with the fact that old pipes lose up to 50 percent of water carried, make the city’s water supply often unreliable and problematic for industries located in Blantyre.

Energy The electricity grid covers almost the entire city. The local source of electricity is hydro-based, largely generated from the Shire River. Where service is Source: The National Statistical Office of Malawi available, there are frequent disruptions, with load

3 55.4°F 4 69.8°F 5 Blantyre City Assembly (2007). Blantyre Urban Structure Plan: Volume 1, Background and Studies Report (Blantyre: Blantyre City Assembly). 6 Blantyre City Assembly (August 2007). City of Blantyre Situation Brief (Blantyre: Blantyre City Assembly). 7 Blantyre City Assembly (2006). Situation analysis of informal settlements — cities without slums initiative, Final Report (Blantyre: Blantyre City Assembly).

FDI in Blantyre Page 14 shedding occurring regularly due to problems related to low water levels. In Malawi as a whole, only 2-5 percent of the population has access to electricity, and firewood is the primary source of energy for cooking for the majority of the population.8

Figure 3: Blantyre City Snapshot City Area Covers a total area of 22,800 hectares of hilly ground. Estimated at 778,000, with a total country population of 13.2 million.9 Blantyre is City Population (2007) undergoing rapid population growth due to urbanization. 57.4% (Unemployed) Employment 38% (Economically active) 10% (Informal)10 65% of households live below the poverty line.11 Poverty 46% of households earn less than MK4,000 per month (US$50). Life Expectancy 37 years (38 years for Malawi). 26.9% with no education. Literacy rate 85.2% lack formal skills. Source: Blantyre City Assembly (2006),“Situation Analysis of Informal Settlements.”

Roads The city’s road network covers a distance of 344 miles, of which 35.5 percent is paved. The road system within the formally developed areas of Blantyre has adequate capacity to accommodate current volumes. However, given the City Assembly’s lack of resources, the condition of the city’s paved roads is poor. Despite deficiencies, Blantyre lies on a central transport route and is connected to all parts of the country as well as neighboring countries, including Mozambique and Zimbabwe.12 Blantyre City Economic Profile Blantyre remains Malawi’s commercial capital and largest city. The city has reasonably well-developed physical and social infrastructure, with access to all parts of Malawi and neighboring countries through road, rail, and air links. However, most essential services, especially water and power, have significant shortcomings, including low coverage level, poor maintenance and repair, frequent service disruption, and management problems.13

The primary sectors, including agriculture, fishing and mining, make up only a small portion of the Blantyre economy. While the manufacturing industry remains the most important employer in the city, wholesale and retail traders also make up a large part of the city’s economy.14

Blantyre city does not have the authority and autonomy to offer local incentives to foreign investors. Therefore, unlike its competitors—large metropolitan areas in neighboring countries—investment incentives at the city level are almost non-existent. With no statutory authority for the city to act independently, it is unable to make contracts with foreign investors on its own, except for local incentives

8 Ibid. 9 Malawi Investment Promotion Agency (2007). Investor’s Guide to Malawi 2007. 10 Blantyre City Assembly (2007). Blantyre Urban Structure Plan: Volume 1, Background and Studies Report, (Blantyre: Blantyre City Assembly). 11 UN-HABITAT (September 2003). Sustainable Cities Programme: Blantyre & Lilongwe. http://ww2.unhabitat.org/programmes/sustainablecities/documents/lilongwe.pdf. 12 Blantyre City Assembly (2006). Situation analysis of informal settlements — cities without slums initiative, Final Report (Blantyre: Blantyre City Assembly). 13 Blantyre City Assembly (August 2007). City of Blantyre Situation Brief , (Blantyre: Blantyre City Assembly). 14 Blantyre City Assembly (2007). Blantyre Urban Structure Plan: Volume 1, Background and Studies Report (Blantyre: Blantyre City Assembly).

FDI in Blantyre Page 15 such as tax holidays or city land grants.15 Currently, applications for FDI in the city are centrally managed by government agencies, such as MIPA, whose branch is also located in Blantyre. Another challenge for Blantyre is poor coordination between key stakeholders, including municipal boards, governmental agencies and service providers, resulting in the under-utilization of scarce resources and uncoordinated planning.16 There is a need for the Blantyre City Assembly to establish formal communication channels with many of these stakeholders. Blantyre City Political Profile After three decades of one-party rule under President Hastings Banda, Malawi held multiparty elections in 1994. The current President, Bingu wa Mutharika, was elected in May 2004 after a failed attempt by the previous president to amend the constitution to permit another term. Since coming to power, President Mutharika has taken robust steps to crack down on state corruption. The administration’s efforts to curtail corruption and government spending have contributed to building amicable relationships with international donors, who provide 80 percent of the country’s development budget.17 Malawi is expected to hold Presidential and Parliamentary elections in May 2009. Former President Bakili Muluzi is expected to run for presidency.

As a part of the participatory democratic process, Blantyre had elected city councilors until 2004.18 The Blantyre City Assembly does not receive much funding from the Government and its only source of income is city taxes on property, imposition of which requires an approval from the Government.19

While decentralization has taken place in Blantyre in accordance with the Local Government Act of 1998, corruption and financial shortfalls continue to be major challenges for the city.20

15 DLA Piper US LLP (November 2007). Millennium Cities Initiative: Report on the Regulatory Framework for Foreign Direct Investment, Malawi. 16 Ibid. 17 Freedom House (April 16, 2007). Freedom in the World - Malawi (2007). http://www.unhcr.org/cgi- bin/texis/vtx/refworld/rwmain?docid=473c55dcc. 18 Blantyre City Assembly (August 2007). City of Blantyre Situation Brief (Blantyre: Blantyre City Assembly). 19 Costly Chanza, Blantyre City Assembly (January 9, 2008). Personal interview. 20 Tambulasi, Richard I.C. and Happy M. Kayuni (2007). "Opening a New Window for Corruption: An Accountability Assessment of Malawi’s Four Years of Democratic Local Governance," Journal of Asian and African Studies vol. 42 (2).

FDI in Blantyre Page 16 III. Industry Assessments 1. Cotton and Textiles Industry Analysis Industry Overview The 1950's were a successful decade for the cotton sub-sector in Malawi. During the decade, state- controlled prices set by the country’s sole textile manufacturer, the parastatal David Whitehead & Sons (DW&S), along with strong international demand, contributed to a peak production of 100,000 tons of cotton per year.21 The following decades witnessed the decline of the industry from its peak levels in the 1950's to a mere 14,700 tons by 2002-2003.22 While the privatization and subsequent near collapse of DW&S was a key factor in this decline, many other factors such as increasing competition from Asian counterparts, growing trade liberalization, dumping of secondhand clothing, declining farmer productivity, and chronic underinvestment played major roles as well. Only in recent years has the cotton sub-sector begun to rebound with the help of rising international demand and a successful lending initiative led by two ginners, resulting in current production of approximately 58,569 tons in 2006.23

Figure 4: Exports to the United States24 US$ (thousands) 2005 2006 2007 Malawi Textiles and Apparel: Exports to US 22,781 18,187 19,830 Total through AGOA 22,648 18,187 19,830 All Sectors: Exports to US 82,444 79,010 69,007 Total through AGOA 65,902 60,908 59,309 Swaziland Textiles and Apparel: Exports to US 160,987 135,204 135,296 Total through AGOA 159,367 134,423 134,635 All Sectors: Exports to US 198,876 155,807 147,963 Total through AGOA 176,117 149,815 141,410 Lesotho Textiles and Apparel: Exports to US 390,690 387,242 383,566 Total through AGOA 388,452 384,452 379,616 All Sectors: Exports to US 403,471 79,010 443,018 Total through AGOA 388,584 60,908 379,617 Source: U.S Department of Commerce.

The post-privatization struggles of DW&S, which was acquired by Mapeto Wholesalers in 2003 and renamed Mapeto (DWSM) Ltd., led to a disintegration of the entire cotton-textiles-garment value chain, which persists to this day. Due in large part to this fragmentation, Malawi has not been able to attract

21 K.K. Desai, Knitwear Industries (January 14, 2008). Personal interview. 22 Coyne, Sarah (September 2004). Cotton Sub-Sector Draft Report (Blantyre: Kadale Consultants). 23 Estimates from the Malawi Investment Guide and sub-sector stakeholders suggest that production numbers were actually closer to 46,000 tons; See Ministry of Agriculture and Food Security Annual Agricultural Statistical Bulletin 2006/07. 24 “All Sectors” include textiles and apparel.

FDI in Blantyre Page 17 much investment into the textile and garment sub-sectors and lags behind its regional competitors, namely Swaziland and Lesotho. While textile and garment production in these two southern countries was less than that of Malawi fifteen years ago, both Swaziland and Lesotho now export well above Malawi's totals, due largely to strong investment (see Figure 4). 25 A revitalized textile sector would stimulate cotton production, generate employment, and supply much-needed cloth for garment makers. The textile segment of the value chain, in particular, is in dire need of an investment infusion. This point is of special significance, considering that Malawi currently enjoys preferred access to the US market through AGOA. For Malawi to continue reaping the benefits of this agreement, it will need to source its fabric locally or regionally, instead of relying on cheap fabric from East Asia before the provision to source textiles materials from non-AGOA countries expires in 2012.26 Value Chain Analysis In Malawi, the disintegration of the textile production sub-sector has led to a gap in the value chain which can be described as follows:27

1. Cotton production value chain: comprised of cotton-growing farmers and ginneries, in which seed cotton is separated into lint (37 percent) and cottonseed (58 percent).28 While over 95 percent of the lint is exported to other countries for spinning—typically the ginning company’s home country—the majority of the cottonseed is processed locally into oil for domestic consumers, with animal feed as a by-product.29 The four ginners that currently operate in Malawi are Great Lakes Cotton Company (Great Lakes), Cargill (formerly Clark Cotton Malawi), Iponga, and a new entrant, Toleza.

2. Textile manufacturing value chain: consists of the country's sole textile manufacturer, Mapeto, that spins less than 5% of the country's lint into yarn, which is then exported or weaved into loom cloth before either being exported or sold to the local consumer market.

3. Domestic garment manufacturing value chain: comprised of several firms that sell to the domestic market. They buy a very small proportion of their cloth from Mapeto DW&S.

4. Export garment manufacturing value chain: comprised of several large firms specially designated as Export Processing Zones. They import all of their material for production, since Malawi does not currently produce the right quality of cloth. Sub-sector Analysis: Cotton/Textiles/Garments Cotton ranks as the fourth most important export crop in Malawi – behind tobacco, tea and sugar – supporting more than 120,000 rural households and grown on a reported 60,688 hectares of land.30 While the Blantyre area is responsible for only a small proportion of the country's yield (see Figure 5), it lays in close proximity to the Shire Valley, which accounts for nearly half of the country's production.

25 Currently, Lesotho is Africa's biggest exporter of garments to the United States. 26 This is the so-called "Double Transformation" requisite in AGOA. The agreement stipulates that by 2012, the cotton must undergo two transformations in the country of origin. For example, yarn could be woven into fabric (first transformation) and then made into a garment (second transformation) to satisfy the requirement. 27 The Privatization Commission. http://www.privatisationmalawi.org/. 28 Assuming losses of around 5%. 29 Agar, Jason (September 2007). Credit Demand and Supply, Cotton Sector, Malawi (Blantyre: Kadale Consultants). 30 Ibid.

FDI in Blantyre Page 18 Figure 5: Cotton Hectarage and Production (2006-2007 Estimates) Cotton Hectares (ha) Production (tons) Mzuzu 46 29 Karonga 1,777 1,689 Kasungu 1,917 1,745 Blantyre 2,042 2,211 Lilongwe 3,707 3,705 Salima 6,872 6,692 Machinga 18,217 15,570 Shire Valley 26,090 30,181 National 60,673 63,290 Source: Ministry of Agriculture and Food Security.

The recent growth of the cotton sector, as seen in Figure 6 has been largely due to the lending and input subsidy initiatives first implemented with the creation of the Cotton Development Association (CDA) in 2002-2003. The CDA, a consortium of the country's key stakeholders in the cotton industry, was spearheaded by the two major cotton ginners—Great Lakes and Cargill—to spur local production. Despite having received the backing of the Government of Malawi, this association is insufficient in that it is no substitute for a National Cotton Council, which has the ability to regulate the industry as a whole and represent all of its key players. The current Cotton Act in Malawi is outdated, and there was a movement to revise it to include the establishment of the Cotton Council, which would oversee proper planning, research & extension, quality and marketing under a multi-sector approach (the initiative was originally led by the private sector), and to be financed by the levy. However, the Government has yet to approve the proposal.31

Figure 6: Malawi's Main Exports by Value (2000-2006) MK (millions) 2000 2001 2002 2003 2004 2005 2006 Tobacco 14,200.3 18,363.3 17,893.1 24,191.2 22,303.5 31,241.5 55,840.0 Tea 2,235.4 2,461.0 2,827.8 3,481.5 5,132.5 5,937.4 6,737.0 Sugar 2,339.2 3,975.7 2,684.2 10,571.4 7,881.4 5,408.5 6,391.0 Apparel/Garments 797.8 2,018.0 2,464.6 3,858.1 4,795.5 4,995.7 5,525.0 Cotton 438.5 316.6 260.8 483.9 2,224.3 1,847.1 2,054.0 Nuts 239.7 368.2 378.1 1,132.0 1,581.0 1,473.0 1,003.0 Source: NSO/ 2007 Economic Report.

The two major cotton ginners—Great Lakes and Cargill—are headquartered in Blantyre and are subsidiaries of multinationals. Great Lakes’ parent company is the UK-based Plexus Cotton Limited, a vertically integrated raw cotton supplier, and Cargill is a subsidiary of Cargill, Inc., an American global provider of food, agricultural and risk management products and services. Both companies supply most of their lint to their parent companies. Iponga was the only other ginner operating in the country until Toleza from Balaka started its operation in 2008. Despite the recent upward trend of production, the cotton ginneries regularly operate at roughly 30 percent of capacity.32 Furthermore, given the fact that each gin has a capacity of approximately 20,000 tons/year, the country as a whole is capable of producing well over 100,000 tons.33 Hence, there is room for a significant increase in smallholder cotton production without the need for additional capital investment on behalf of the ginners.

31 Duncan Warren, NASFAM (March 12, 2008). Personal interview. 32 Pieter Verster, Great Lakes Cotton Company (January 16, 2008). Personal interview. 33 Ibid.

FDI in Blantyre Page 19 Textiles All textile production in the country is manufactured by Mapeto, a former parastatal located in Blantyre city. Plagued by severe financial difficulties (e.g. yarn production fell from 30 million meters in the early 1980's to 100 thousand meters by 2002), the company was forced into receivership in 2002, only to resume operations in 2003.34 The disruption of the domestic market as a result of severe dumping and smuggling of finished textile goods played a key role in the company's struggles.

Currently, the spinning operations of Mapeto buy up less than 5 percent (1,000-1,500 tons per annum) of the country's domestically produced lint.35 Furthermore, only a very small percentage of its yarn and cloth production is purchased by the country's domestic-oriented garment makers, with the rest being exported or sold directly to the consumer market. Since the company does not produce higher quality fabrics required by international standards, it does not supply the country's garment exporters.

Figure 7: Cotton Area, Yield, and Production Trends (1985 – 2007)

Source: Ministry of Agriculture and Food Security.

Garments The garment industry in Malawi is relatively small, consisting of approximately 8 major companies, most of which are located in Blantyre. The garment industry is divided into EPZ-designated exporters and local-market suppliers. Domestic-oriented garment producers mostly import their fabric (a minimal amount is bought from Mapeto) and supply a market that is flooded with imported secondhand clothing— a by-product of increased liberalization. As incomes in Malawi are generally low, locals generally prefer the cheaper secondhand clothing, making this a difficult market to enter. Some of these garment producers export regionally, but do not account for much of the overall production.

Garment exporters generally source most of their fabric from India, Taiwan, and China, as regional fabric is not regarded as being of sufficient quality. At the moment, exports are destined mostly for South Africa, with an increasing amount being shipped to the US through the AGOA agreement. These firms are not allowed to supply the domestic market given EPZ regulations.

Once again, the data in Figure 4 for Lesotho and Swaziland underscore the growth potential of the garment industry in Malawi. The textile exports of all three countries as a share of the overall totals also further highlight the unique opportunities presented by AGOA for garment exporting.

34 The Regional Trade Center (RATES) (July 2003). Cotton-Textile-Apparel Value Chain Report Malawi. (Nairobi: RATES). 35 Agar, Jason (September 2007). Credit Demand and Supply, Cotton Sector, Malawi (Blantyre: Kadale Consultants).

FDI in Blantyre Page 20 Opportunities The textile production value-chain is of paramount importance to the sustainability and future of Malawi's garment industry. At the moment, Malawi is taking advantage of its privileged position in international garment trading enabled by AGOA's duty-free access to the US market. However, as soon as the region's safeguards are removed and AGOA's sourcing requirements become stiffer, the country will find itself on the same playing field as India and East Asia, which may signal the end of the Malawian garment industry’s competitive advantage. 36 To prevent this from occurring, it is necessary that the country revitalize its textile industry and reconnect the separate sectors into a vertically integrated value-chain spanning cotton production, spinning, weaving, knitting, and garment production.

Currently, the garment manufacturers—exporters and local producers—must rely on imported cloth for the majority of their raw material needs. This represents additional transaction costs and turnaround time that undermine the reliability, efficiency, and competitiveness of the sector. Garment producers, relying on relatively low labor costs and minimal capital investment, could easily absorb a higher domestic supply of yarn and fabric, which would allow them to increase their supply to international markets.37

As previously mentioned, Mapeto is currently the country's sole textile producer, spinning less than 5 percent of the country's lint. However, it is looking to expand its operations and has said that it would welcome investment, as it already has some capital investments planned for the upcoming years to increase its capacity.38 This represents a unique opportunity for investment in a company that already has industry expertise at a time when Malawi enjoys preferential access to international markets. It has been projected that on-site expansion of operations, encompassing a significant expansion of AGOA-quality weaving capabilities, would take a minimum of two to three years to achieve.39 Funding will be necessary for Mapeto to purchase about 100 looms valued at approximately US$500,000 each, suggesting a total investment size of US$50 million. 40 If its production capabilities are enhanced through investment, Mapeto can enjoy privileged access to the Malawian market of garment producers, and also access to the regional market, which is subject to the same sourcing requirements.

Another alternative is setting up a new installation encompassing a vertically-integrated textile- manufacturing operation. This represents, however, a costlier investment than the existing on-site expansion and has a longer time frame, which may preclude the company from achieving full operating and AGOA-compliant status before the 2012 deadline. Nonetheless, this type of investment is important for the long-term growth and sustainability of the industry.

The Government of Malawi has been somewhat slow to support the industry, but things have begun to change as the Ministry of Agriculture and Food Security requested a budget of MK 150 million41 for the 2007-2008 growing season to provide input subsides for cotton growers.42 The Government is aware of the need to ramp up cotton production with a view to creating adequate supply for the value-adding components of the value chain, i.e. textiles and garments. In line with this initiative, cotton has been listed as a priority sector in the Malawi Growth and Development Strategy (MGDS).43

36 The local/regional sourcing requirement is set to come into effect in 2012. 37 K.K. Desai, Knitwear Industries (January 14, 2008). Personal interview. 38 Ibid. 39 Cockcroft, John (2003). Regional Market Assessment on Lint and Textiles (Nairobi: The RATES Center). 40 Martin Mpata, Mapeto DW&S (January 17, 2008). Personal Interview. 41 US$1.09 million 42 K.K. Desai, Knitwear Industries (January 14, 2008). Personal interview. 43 Agar, Jason (September 2007). Credit Demand and Supply, Cotton Sector, Malawi (Blantyre: Kadale Consultants).

FDI in Blantyre Page 21 Constraints The Malawian textile industry currently suffers from chronic underinvestment that has resulted in the disaggregation of the cotton-textile-garment value-chain. Major constraints are as follows:

Lack of a Cotton Council The failure of the Government to update the Cotton Act to include the creation of a Cotton Council with the ability to regulate and reintegrate the industry along the value chain, has led to incoherent policy that does not align incentives for all stakeholders. For example, in an effort to help poor farmers, in 2008 the Government established a minimum price for cotton of MK 65/kg,44 compared to MK 40/kg45 for 2007.46 This significant increase in the floor price, however, has come at the expense of the ginners, who are currently re-evaluating their operations and assessing their cost structures to see if they can remain profitable. In Zambia, for example, cotton was priced at ZK1,12547 per kg in 2007, after the Government increased the floor price by 32 percent.48

Cost of Investment The machinery and capital investments required in textile manufacturing are high-value investments requiring access to capital, which is not easily available in Malawi. This is partly responsible for the dearth of investment in the industry today.

Access to Financing The prohibitive rate of local borrowing for investment, which is currently 24 percent,49 makes it difficult for industrial participants to make capital investments to replace or maintain existing machinery, affecting production quality, efficiency and capacity. Furthermore, at the smallholder level, limited access to financing has forced the ginners to become lending institutions, which has resulted in increased costs.

Value Chain Gap There is currently a breakdown in the supply chain with the ginners exporting lint, which forces Mapeto to import much of this input, instead of using local supply.50 A potential investment in Mapeto or in a new textile production facility would increase the capacity of this industry and fill in the value chain gap by creating the demand necessary to absorb a large enough supply of lint, so that it is profitable for cotton ginners to supply to local industry.

Supply-Side Constraints About 60,000 tons of cotton was produced nationally in 2006. While this represents an increase from previous years, it still is not enough to meet the ginners’ combined available capacity of over 100,000 tons. Despite the efforts of the CDA and the ginners to increase production, all ginners continue to produce under capacity. Significant development of textile manufacturing will increase the demand for lint, which should optimally be supplied by the local ginners.

Competition from International Imports The local market is flooded with cheaper secondhand fabrics that displace the demand for garments supplied by domestic-oriented garment producers. As a result, any investment in textile manufacturing should be geared towards making fabrics for the international market, with special attention to meeting AGOA standards.

44 US$0.47/kg. 45 US$0.29/kg. 46 Pieter Verster, Great Lakes Cotton Company (January 16, 2008). Personal interview. 47 US$0.28/kg. 48 Fibre 2 Fashion (May 18, 2007). "Zambia: Cotton farmers cheer floor price rise." 49 IMF projection for 2008. 50 Martin Mpata, Mapeto DW&S (January 17, 2008). Personal Interview.

FDI in Blantyre Page 22 Impact and Feasibility Assessment

Impact Employment A revitalized textile-manufacturing sector would generate employment at the plant level. Until 1993, DW&S relied on over 4,000 employees, and after privatization in 2003, Mapeto expected to invest over US$10 million in the rehabilitation of the plant, creating 3,500 jobs over a 5-year period.51 Furthermore, increased demand for cotton from the textile-manufacturing sector has the potential to increase labor demand at the farm and garment production levels, where cheaper raw materials can facilitate expansion.

Linkages (Backward and Forward) A healthy textile-manufacturing sector is the missing link to a vertically integrated cotton-spinning- garment value chain. This will have an impact on the other sectors of the chain through their responses to demand and supply factors.

Feasibility Demand Factors Currently, Mapeto supplies a negligible amount of cloth to domestically-oriented garment producers and none to the exporting garment producers. Consequently, local garment companies are forced to source their fabrics from outside the region. Key stakeholders in the garment industry have pointed to the fact that a robust local textile-manufacturing sub-sector would be able to supply the entire garment industry.52 Furthermore, the large international demand for garments and preferential access to regional/international markets (especially in the United States) signals an opportunity for the growth of local textile manufacturing.

Supply Factors Cotton processors are currently ginning 46,000 tons of lint per annum, of which only 1,000 – 1,500 tons per annum is being spun by the domestic textile-manufacturing sub-sector. Even without considering any trends in cotton production, this shortfall is indicative of the amount of lint a revitalized textile- manufacturing sector would be able to absorb from local cotton ginners.

Enabling Environment While a revision of the Cotton Act is necessary, especially as it relates to the establishment of a Cotton Council, Malawi has specifically designated cotton as a priority sector. The MGDS addresses the importance of this industry as well.53 2. Cassava Industry Analysis Industry Overview Cassava is an essential part of the diet of more than half a billion people. It is the third largest source of carbohydrates for human food in the world; its roots are high in calories, and the leaves are a good source of protein and vitamins A and B.54 Food use represents more than half of total cassava consumption, consisting largely of fresh cassava and processed flour. 55 However, the commercial possibilities of

51 Fekete, Paul et al (2004). Malawi: Integrated Framework Diagnostic Trade Integration Study (Geneva: Integrated Framework Working Group).; Also see the privatization Commission. 52 K.K. Desai, Knitwear Industries (January 14, 2008). Personal interview. 53 Agar, Jason (September 2007). Credit Demand and Supply, Cotton Sector, Malawi (Blantyre: Kadale Consultants). 54 Fauquet, Claude and Denis Fargette (1990). "African Cassava Mosaic Virus: Etiology, Epidemiology, and Control," Plant Disease 74/6 (June ). 55 Susila, Wayan R. (2003). "Good Prospects For Cassava Development," CGPRT Flash 1/2 (September).

FDI in Blantyre Page 23 industrial cassava products are increasingly receiving attention given its potential for export. Since the 19th century, cassava has extended rapidly across Africa. Consequently, it is now the largest center of cassava production.56

Global Market Landscape Approximately 70 percent of world cassava production is concentrated in five countries—Nigeria, Brazil, Thailand, Indonesia, and the Democratic Republic of Congo. 57 While mainly grown in Brazil and Thailand as an industrial crop for export purposes, cassava in Africa is used primarily for local consumption.58 Cassava production has been growing steadily. In 1983, world cassava production was about 131 million tons. In 1999, global cassava production reached over 160 million tons and by 2005, production had reached approximately 210 million tons.59

Figure 8: Global Cassava Production 1983–1985 1993–1995 2005 Average Average Projection Region Area Yield Production Area Yield Production Area Yield Production '000 ha kg/ha '000 ha '000 ha kg/ha '000 ha '000 ha kg/ha '000 ha World 13,855 9,5 131,424 16,540 9,9 163,746 18,595 11,2 207,556 Africa 7,518 7,3 55,207 10,158 8,2 83,062 11,961 9,5 114,202 Latin America & 2,592 11,1 28,690 2,593 11,9 30,804 2,777 12,8 35,590 Caribbean Asia 3,730 12,7 47,371 3,775 13,2 49,740 3,836 15,0 57,572 Oceania 14 11,0 156 13 10,4 139 21 9,3 193 Source: The World Cassava Economy, FAO.

Production in Malawi and Blantyre Cassava production in Malawi has experienced a dramatic surge over the past decade, in all regions of the country. Cassava is the staple food crop for 30 percent of Malawi’s population, particularly for the households along the Lake Shore Districts of Nkhata Bay, Nkhota-Kota, Rumphi and Karonga in the Northern region. It is grown in other parts of Malawi as a complement to maize and for use during critical food shortage periods (between October and March). 60 The emergence of an urban fast food market enabled by high population densities and increasing maize prices has also resulted in increased consumption in central Malawi. Food security concerns have played a larger role in the growth of cassava in southern Malawi. Cassava’s expansion in central and southern Malawi has occurred primarily at the expense of maize and tobacco; in the northern regions, which are less densely populated, cassava has expanded onto new agricultural land.61

56 Fauquet, Claude and Denis Fargette (1990). "African Cassava Mosaic Virus: Etiology, Epidemiology, and Control," Plant Disease 74/6 (June ). 57 FAO. "World Cassava Situation and Recent Trends," The World Cassava Economy. 58 Fauquet, Claude and Denis Fargette (1990). "African Cassava Mosaic Virus: Etiology, Epidemiology, and Control," Plant Disease 74/6 (June ). 59 FAO. "World Cassava Situation and Recent Trends," The World Cassava Economy.. See also “Championing the cause of cassava,” http://www.fao.org/NEWS/2000/000405e.htm. 60 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 61.Haggblade, Steven and Ballard Zulu (December 1-3 ).. "The Recent Cassava Surge in Zambia and Malawi," InWEnt, IFPRI, NEPAD, CTA Successes in African Agriculture Conference.

FDI in Blantyre Page 24 According to the 2006 – 2007 Annual Agricultural Statistical Bulletin, Malawi produced 3,238,943 tons of cassava in 2006-2007 compared to 713,876 tons 10 years earlier, representing a compounded annual growth rate of 16.3 percent. In the same period, maize production grew by 10.2 percent per annum. Assuming that world cassava production remained at the projected 2005 level, Malawi’s production represents a miniscule 1.56 percent of world production. The Blantyre urban area grows about 0.5 percent of total cassava production. In 2006 – 2007, Blantyre produced approximately 16,925 tons of cassava.62

Figure 9: Cassava Production in Comparison to Other Crops in Malawi

Source: Malawi Ministry of Agriculture and Food Security.

A number of supply and demand factors can account for the recent surge in cassava production in Malawi since the mid 1990s:63

1. The dismantling of large maize subsidy systems at the end of the 1980s. The resultant increase in input costs and declining profitability caused farmers to cut back on maize production. Prices of raw roots in urban markets are lower than maize. 2. Improved varieties of cassava that have roughly doubled cassava yields. With the same labor and land without purchased inputs, improved varieties have resulted in increased output. 3. The Malawian drought of 1991 – 1992 cut maize yields dramatically and precipitated an interest in more drought-resistant crops. Consequently, cassava gathered importance at the policy table and government investment in cassava cultivation increased. 4. Arguably, a shrinking labor force due to the high HIV prevalence rates in Malawi has caused a shift favoring cultivation of cassava, a crop known for its ease of cultivation. 5. Demographic and migration trends causing a growth of urban areas combined with a collapse of urban incomes due to HIV-related decreases in life expectancy have fueled demand for cassava as an affordable snack food.

62 Ministry of Agriculture and Food Security (2007). 2006/07 Annual Agricultural Statistical Bulletin (Lilongwe: Government of Malawi). 63 Haggblade, Steven and Ballard Zulu (December 1-3 ). "The Recent Cassava Surge in Zambia and Malawi", InWEnt, IFPRI, NEPAD, CTA Successes in African Agriculture Conference. See also FAO, "Global cassava market study business opportunities for the use of cassava," (2004).

FDI in Blantyre Page 25 Value Chain Analysis Production Cassava does not require chemical fertilizers, and it can grow under serious moisture stress as well as in marginal soils without a significant drop in yields.64 Further, cassava is known for its ease of cultivation since it does not require many inputs or extensive labor.

In Malawi, small farms dominate cassava production. Smallholder farmers grow cassava on small plots in mixed stands with other food crops such as cowpeas, maize and sweet potato, particularly among households in the southern region where land is a major production constraint. A small number of farmers have begun to commercialize cassava production. However, most production is still un-mechanized by smallholder farmers: farm plots under half a hectare account for 79 percent of the cultivated cassava crop area in Malawi, while farm plots under one hectare account for 96 percent of all crop area in Malawi. Thus, there is virtually no commercial production of cassava in the country.65

Processing Cassava is a versatile crop that can be processed into a number of products. Cassava can be processed into food products for household consumption, pellets for animal feed, and starch-based products that have various industrial applications.

Food Products The processing of the root adds value by removing toxins and reducing the water content, which reduces the weight, thereby facilitating transportation and extending the product’s shelf life. Upon detoxification and processing, the root can be processed into chips or flour for human consumption.66

Raw cassava roots and leaves are fit for human consumption. The root is a rich source of carbohydrates, while the leaves provide proteins and minerals. Cassava roots have a very high water content—typically around 70 percent. Cassava roots contain a naturally-occurring toxin—cyanohydrin, a derivative of cyanide—that lends a bitter taste to the root. However, the toxin can be removed by peeling, grating, or squeezing the root.67

Industrial Products The cassava root can be processed into starch that has a wide variety of uses. Different varieties of starches and starch-based products can be manufactured for industrial uses and can be enhanced through simple value-addition techniques or highly complex chemical transformations. Starches subject to complex value-addition techniques are called “modified starches” and unmodified starches are called “native starches.”68

The native and modified starches can be used for a wide variety of purposes:

• Thickening agent: Cassava flour is mainly used in bakery products and cassava starch can be used as a general thickening agent. Modified cassava starch or starch derivatives have been used

64 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 65 Haggblade, Steven and Ballard Zulu (December 1-3 ). "The Recent Cassava Surge in Zambia and Malawi," InWEnt, IFPRI, NEPAD, CTA Successes in African Agriculture Conference. 66 FAO. "World Cassava Situation and Recent Trends, "The World Cassava Economy. 67 Ibid. 68 Ibid.

FDI in Blantyre Page 26 for thickening, binding, texturing, and stabilizing a range of food products such as canned foods, frozen foods, salad dressings, sauces, and infant foods. • Glue: Cassava starch is a very important raw material in making glue. Cassava starch–based dextrates are excellent adhesives and are used in many applications including pre-gummed papers, tapes, labels, stamps, and envelopes. • Confectionary: Modified cassava starch or starch derivatives are used in confectionery for different purposes such as thickening and glazing. Cassava starches are widely used in sweets such as jellies and gums. • Pharmaceuticals: Native and modified cassava starches are used as binders, fillers, and disintegrating agents for tablet production. • Sweeteners: Glucose and fructose made from cassava starch are used as substitutes for sucrose in jams and canned fruits. Cassava-based sweeteners are preferred in beverage formulations for their improved processing characteristics and product-enhancing properties. • Plywood: Glue made from cassava starch is a key material in plywood manufacturing. • Paper: Modified cassava starch is used in the wet stage of paper making to flocculate the pulp, improving the run rate and reducing pulp loss. Native and modified cassava starches are also used in the coding and sizing of paper. • Textiles: Cassava starch is used in three stages of textile processing: sizing the yarn to stiffen and protect it during weaving, improving color consistency during printing, and making the fabric durable and shining at finishing. Sub-Sector Analysis: Cassava Processing In Malawi, cassava is produced primarily for food consumption; commercial production of starch-based value-added products is virtually absent in the country. Opportunities The robust market for value-added products that can be manufactured as a result of the commercial production and processing of cassava creates numerous opportunities for investment in this sub-sector. Further, given Malawi’s production trend of surging output and the infancy of its commercial cassava- production industry, numerous business opportunities exist involving domestic and export markets. Investment opportunities exist in the following segments of the cassava processing value-chain:

1. Food Products Cassava can be used as an import substitution crop to replace wheat flour. As a result, there is potential for further growth in cassava production provided prices of wheat flour rise relative to cassava flour. A study by the Food and Agriculture Organization (FAO) projected that a 10 percent substitute for imported wheat and wheat flower will translate into a growth potential of 11,926 tons of cassava in Malawi—a 6.28 percent production increase over 1995.69 Hence, a sizeable opportunity exists to set up a cassava flour processing facility.

2. Industrial Products Starch is a multibillion-dollar business worldwide with applications in several industries. There are more importers than exporters in the world market for cassava starch. Consequently, opportunities exist for Malawi to develop a starch manufacturing industry with a view to exporting to regional markets and beyond. Demand for starch products is strong in European, North American, and Asian markets.

69 FAO and IFAD (2004). "Global cassava market study: Business opportunities for the use of cassava," Proceedings of the Validation Forum on the Global Cassava Development Strategy 6.

FDI in Blantyre Page 27 Interviews conducted estimated that an initial investment of US$1 - US$2 million is required for setting up a starch production plant. Such a production plant would produce about 3 tons of starch per hour. Malawi produces virtually no starch currently even though some experts conducting research estimate the local demand to be 3,000 tons.70 Constraints Perishability Cassava roots have a shelf life of 24–48 hours after harvest, and fresh roots must be processed within 2 to 3 days from the moment of harvest. Cassava is also highly susceptible to microbial contamination due to poor handling, humid climate, lack of proper drying, and the long transit time from the field to markets.71

Pest Control Pest and disease pressures from the cassava mosaic virus (CMV), cassava mealybug and cassava green spider mite, lower yields. Losses in tuber yield due to diseases can be as high as 90 percent, making the need to protect cassava against diseases one of the most crucial aspects of producing high-quality cassava.72

Market Size and Access It is known that cassava starch is a versatile material that competes well with maize, wheat and sweet potato starches, with high export potential. However, it should be noted that many markets are not completely open in nature (e.g. European Community) and that price competition is fierce.73

Supply-Side Constraints The disjointed structure of supply, consisting of many smallholder farmers, can be an obstacle for commercialization of cassava production for starch and flour. Associations such as the Southern Africa Root Crops Research Network (SARRNET) and the National Smallholder Farmers’ Association of Malawi (NASFAM) will play an important market linkage and information transfer role.

Quality Control There is significant demand for improved grades and standards for cassava, particularly for industrial uses, and there is potential for price premiums for high quality processed cassava starch and cassava flour. However, most cassava varieties grown in Malawi cannot meet the FAO food safety standard measured by the level of cyanogens. Even with increased investment in plant breeding or post-harvest technologies, such a minimum level may not be attained. As such, quality standards may hinder the increased export of cassava as edible products.74 Impact and Feasibility Assessment

Feasibility Demand Factors An FAO study of global cassava demand noted that growing urbanization offers opportunities to develop markets for cassava. Opportunities to increase consumption are dependent on the consumption of cassava

70 Vito Sandifolo, International Institute of Tropical Agriculture (March 19, 2008). Personal interview. 71 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 72 Ibid. 73 FAO and IFAD (2004). "Global cassava market study: Business opportunities for the use of cassava," Proceedings of the Validation Forum on the Global Cassava Development Strategy 6. 74 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development).

FDI in Blantyre Page 28 by urban residents and a distribution system linking consumers to producers. Moreover, the realization of increased cassava consumption depends on the availability of improved infrastructure, better handling and storage technologies, etc. As noted in the FAO case study, given the increased demand for cassava chips and pellets, and cassava starch in non-producing countries, the potential for cassava growth in producing countries is substantial.75

Supply Factors In Malawi, cassava is primarily grown by smallholder farmers who are not necessarily organized. In addition, another major factor affecting increased production and quality of cassava is the scarcity of planting materials. Local cassava varieties are small in size (often preferred for ease of transport to markets) and some varieties contain high hydrogen cyanide (HCN) content in the roots and leaves of the local cultivars.76

Enabling Environment Recently, the Malawian Government and NGOs have been pushing the production of cassava as a food security measure in times of drought. For example, SARRNET has implemented various initiatives aimed at promoting seed multiplication and distribution of new cassava varieties to address the issue of scarcity of planting materials. Since 1994, cassava production has increased by more than 500 percent as a result of efforts by the Government and SAARNET to replace low-yielding local cultivars.77

Profitability Production of cassava requires minimum capital investment and low direct costs. The gross margins are much more attractive for the farmers compared to other products. According to the 2006/2007 Annual Agricultural Statistical Bulletin, Malawi’s current yield is 12-30 tons per hectare and is sold at MK27.44/kg,78 while maize yields 400-1,500 kg per hectare and is sold at MK27.65/kg.79 80

Impact There are many benefits to cassava production. Most directly, increased cassava production will result in improved food security and higher farmer incomes.

Income In central and southern Malawi, where a majority of farmers’ share of crop is sold, cash returns have grown considerably, making cassava one of the most profitable cash crops in the country. A recent study suggests that cassava returns are three times that of maize, groundnuts and tobacco.81

Spill-over Effects We can anticipate a marginal impact on the freight and packaging industries as a result of investment in cassava production.

75 FAO and IFAD (2004). "Global cassava market study: Business opportunities for the use of cassava," Proceedings of the Validation Forum on the Global Cassava Development Strategy 6. 76 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 77 Ibid. 78 US$0.20/Kg i.e. US$2,350 - US$5,880/ ha. 79 US$0.20/Kg i.e. US$78-294 / ha. 80 Ministry of Agriculture and Food Security (2007). 2006/07 Annual Agricultural Statistical Bulletin (Lilongwe: Government of Malawi). Also see IDEAA/MACE website: http://www.ideaamis.com/. 81 Haggblade, Steven and Ballard Zulu (December 1-3 ). "The Recent Cassava Surge in Zambia and Malawi," InWEnt, IFPRI, NEPAD, CTA Successes in African Agriculture Conference.

FDI in Blantyre Page 29 Sustainability Given that cassava production does not heavily depend on purchased farming inputs as compared to other crops, farmers can continue growing cassava with minimum need for extensive seed suppliers, fertilizer distributors or rural credit programs to sustain high yields. Moreover, the environmental effects of cassava production are minimal as the process does not generate the acidification or pesticide residue that may result from the production of other crops.82 3. Pigeon Pea Industry Analysis Industry Overview Pigeon pea is the most versatile grain legume used by farmers in Malawi and has been grown in Africa for about 4,000 years.83 In Malawi, the crop is grown mainly by smallholder farmers. It is grown for both local consumption and export, and is generally intercropped with Malawi’s staple food crop, maize. Pigeon pea has multiple usages, as grain, firewood and livestock feed, field boundary markings, and soil fertilizer. Pigeon pea is drought-tolerant and provides multiple benefits, as it can produce good yields with limited inputs while also being a potential cash crop. According to the India-based International Crops Research Institute for the Semi-Arid Tropics (ICRISAT), pigeon pea is an agriculture product that benefits the resource-poor smallholder farmer who “operates in a variable, semi-arid environment and generally lacks access to technology, cash, and other resources.”84

Global Market Landscape According to the FAO, pigeon pea’s world production was approximately 3.5 million tons in 2005. India is both the major global producer and consumer of pigeon pea, accounting for 2.4 million tons, which represents 68.5 percent of world production. Malawi is the fifth largest producer in the world with an estimated 79,000 tons annually as shown in Figure 10. Eastern and Southern African countries are among the largest exporters trying to meet India’s growing demand for pigeon pea. Exports are in the form of green and split pea. The split form is called daal in India and is a local staple food.

Figure 10: Pigeon Pea World Production (in tons) Country 2001 2002 2003 2004 2005 India 2,250,000 2,260,000 2,210,000 2,430,000 2,400,000 Myanmar 325,000 466,000 4,85,000 500,000 500,000 Kenya 73,463 93,203 98,280 105,571 105,000 Uganda 80,000 82,000 84,000 84,000 84,000 Malawi 79,000 79,000 79,000 79,000 79,000 Source: Food and Agriculture Organization, FAOSTAT database.

Production in Malawi and Blantyre Since pigeon pea is a viable crop in dry, wet and subtropical regions, it is well adapted for Malawi. In the southern region, where the city of Blantyre is situated, pigeon pea can be found in Mount Mulanje (40 miles Blantyre), the Zomba Plateau (40 miles from Blantyre) and the Mangochi area (120 miles from Blantyre). According to the official statistics from the Ministry of Agriculture and Food Security of Malawi, both the hectarage and production volume of pigeon pea have grown in the last ten years. However, the trends have not been steady, reflecting one of the major constraints for any agricultural investment in Malawi: the unreliability of the commodity supply (See Figure 11).

82 Ibid. 83 Silim, S.N., Mergeai, G., and Kimani, P.M. (eds) 2001. (Sepember 12-15, 2000). Status and potential of pigeon pea in Eastern and Southern Africa: proceedings of a regional workshop, (Nairobi: International Crops Research Institute for the Semi-Arid Tropics & Gembloux Agricultural University). 84 Ibid.

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Figure 11: Production Supply of Pigeon Peas in Malawi 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Ha 126,494 137,332 136,019 139,899 147,760 138,680 155,990 150,173 Tons 91,569 99,261 105,849 105,315 116,895 93,157 63,883 130,987 Source: Ministry of Agriculture and Food Security, Government of Malawi. Value Chain Analysis The size of the domestic pigeon pea market in Malawi is negligible. Almost the entire local production is devoted to exports.

Production Malawian pigeon peas are grown by smallholder farmers as an intercrop with other products such as maize and cotton. These farmers own small plots of land with an average size ranging from one to two ha.85 The quality of the product is irregular and mostly poor, and needs standardization. There are no large–scale commercial estates growing pigeon peas. The farmers sell their yields (between 0.1 to 0.5 tons per hectare) to local traders, who then sell the product to regional middlemen and to the processing companies.

Processing The processing companies can export the pigeon pea in two forms: raw seed and split as daal. The value added to the pigeon pea in this processing activity is not significant: the pigeon pea is split after being dried and cleaned. Sub-Sector Analysis: Pigeon Pea Processing The growing demand from India has created a market for processing this commodity. There are four major pigeon pea processing companies in the Blantyre area: Export Trading Company, Transglobe Produce Exports, Rab Processors, and Commodity Processors Limited. Export Trading is the leading processor, with production levels of between 30 to 40 thousand tons per year. Its headquarters are based in Dar-es-Salaam, Tanzania. Transglobe, Commodity Processors, and Rab Processors are locally-owned companies. In addition to pigeon pea processing, Rab Processors also owns several branded pre-packaged products such as roasted peanuts, tea, daal and peanut butter.

Even though India is the major buyer, Malawi also exports pigeon peas and daal to countries such as United Arab Emirates, Mauritius, Malaysia, South Africa and Indian communities in United Kingdom.86 The world daal market is closely linked to the Indian diaspora.87 Opportunities Both the establishment of a daal processing factory and the extension of existing facilities are recommended investments in Blantyre. Daal is an established export product in the city and the business linkages between local producers and Indian and Southeastern Asian buyers are very strong. The City of Blantyre is also located in the center of the southern region with easy access to the growing areas.

Several factors enable the consideration of pigeon pea and daal processing as a viable investment opportunity for FDI in Blantyre. The technology requirement for this investment is not high. Since most production is export-oriented, the processing companies enjoy some benefits from the Government of

85 Mahmood Dalvy, Commodity Procesor Limited (March 26, 2008). Personal interview. 86 Ibid. 87 Snapp, S.S., Jones R.B., Minja E.M., Rusike J. and S.N. Silim (October 2003). "Pigeon Pea for Africa: a versatile vegetable and more," Hortscience vol. 38/6.

FDI in Blantyre Page 31 Malawi, namely the EPZ designation. This Government initiative promotes export activities through the duty refunds on imported machinery. Constraints Supply The production is solely concentrated on smallholder farmers who are very sensitive to the market behavior of other commodities. This translates into an erratic supply of pigeon peas and an output of variable quality. The availability, quantities and volumes required for an increase in the export capacity of the pigeon pea sector are not guaranteed for the current model of production.

Transportation Transportation costs account for 30–35 percent of the final costs, especially freight from the processing company to the ports.88 Malawian companies need up to 12 days to fill a container for export to India while a South African exporter can fill a similar order in just 48 hours.89

Variety In order to take more advantage of the timing of the Indian harvest, the development of early maturing varieties is recommended. Malawi should export pigeon peas in April and May when the market prices in India are at their peak. The lack of standards and grades also makes it difficult to secure a reliable flow of supply for any daal processing factory.

Export Promotion The Government of Malawi does not have any export promotion program oriented to the pigeon pea industry. Aside from the EPZ incentive, available to any company that exports 100 percent of their products, there is no specific incentive to export pigeon pea or daal, in spite of the growth in recent years.90 Impact and Feasibility Assessment Impact Employment A stronger pigeon pea export sector would not only create new factory jobs in Blantyre, but also create jobs for farmers, with the increase in demand.

Incomes The characteristics of pigeon pea—drought-tolerant, no fertilizer required, intercropping capabilities— make this crop very attractive for farmers in comparison to other more expensive crops.

Skill Set Daal processing does not require a new set of skills for workers or heavy infrastructure and machinery investments. Furthermore, Malawians of Indian origin who own and manage these factories are often well connected with buyers on the sub-continent. Knowledge of the business and ethnic bonds are two major assets of Malawian enterprises competing in the pigeon pea industry.

Feasibility Demand Factors Growing demand in India has been steady and, according to the ICRISAT 2007 annual report, this emerging economy imports 254 tons of pigeon pea per year and Africa supplies less than 50 percent of

88 Rawindra A. Kamal, Export Trading Company (March 17, 2008). Personal interview. 89 Ibid. 90 Ibid.

FDI in Blantyre Page 32 the world demand.91 In other words, African exports of pigeon pea to India (including Malawi’s) have considerable room for growth. Whatever demand for daal that Malawi does not fill can be provided by its neighbors (Tanzania, Kenya and Uganda).

Supply Factors According to interviews with some of the major processing companies in Blantyre, Malawi’s pigeon peas are favored for their flavor, taste and size by the Indian and United Kingdom markets. 92 The other advantage is related to the season. Malawi can produce pigeon peas when India is in off-season. This late harvest allows Malawian exports to compete with the massive Indian local production and commands a 20–40 percent price premium during September-November.93 This advantage is also valid for the United Kingdom’s market. A survey of three of the four major pigeon pea processors in the city of Blantyre shows that they are running at full capacity.

4. Chili Industry Analysis Industry Overview Malawi produces some of the hottest chilies in the world, known as Bird’s Eye chilies or African Bird’s Eye (ABE). Malawian Birds Eye chilies are internationally renowned and highly sought after. 94 In Malawi, chili has recently emerged as a strong export crop with high expected growth. Although the volume of chili production has significantly increased over the last few years, volumes have not been consistent.95

Global Market Landscape As chili is a relatively simple crop to cultivate, it is produced all over the world. The world production level has seen an increasing trend and there has been a significant rise in the production level since the late 1990s. The world production of chili crop totals around 7 million tons, cultivated on approximately 1.5 million ha. The large demand for chili is made by several main countries, as it is an important part of various cuisines and cultures and is also used as a coloring agent. Most of its demand is generated in the food processing industry. India followed by China, Mexico, Thailand, the US, and the UK96 are among the major global consumers of chili, whereas the major producers are comprised of countries such as India, China, Spain, Mexico, Pakistan and Morocco.97

91 ICRISAT (2007). New horizons for scientific excellence for semi-arid tropics, Annual report 2007. 92 Mahmood Dalvy, Commodity Procesor Limited (March 26, 2008). Personal interview. 93 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 94 National Smallholder Farmers Association of Malawi (NASFAM). www.nasfam.org. 95 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 96 CRN India. Commodity - Chili. http://www.crnindia.com/commodity/chilli.html. 97 Ibid.

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Figure 12: Chili Production Trend in Malawi

Source: Malawi Ministry of Agriculture and Food Security.

Production in Malawi and Blantyre

The production volume of chili has been erratic, as shown in Figure 12. In 2006 – 2007, Malawi produced 1,109 tons of chilies.98 According to the FAO, the producer price in 2005 was US$1,291 per ton—eight times greater than that of maize (see Figure 13). In 2006, Malawian farmers exported 77 tons of chilies to Europe.99

Figure 13: 2005 Malawian Commodity Price Comparison (US$/ton) Commodity Price (US$) Commodity Price (U$$) Coffee 1,597 Potatoes 418 Chilies and Peppers (dry) 1,291 Pigeon peas 213 Tea 1,065 Maize 153 Cotton lint 1,022 Cassava 70 Tobacco, unmanufactured 952 Sugar cane 54 Groundnuts, with shell 532 Source: FAOSTAT.

In southern Malawi, chili has been produced by individual smallholder farmers near Mount Mulanje (40 miles from Blantyre), in Liwonde (100 miles from Blantyre), and in Balaka (55 miles from Blantyre). Based on the 2005 – 2006 data, about 72 percent of Malawi’s chilies were produced in the Blantyre region.100

Currently, Zikometso Smallholder Farmers Association, the largest smallholder chili farmer association in southern Malawi, is capable of producing 200 tons per year. Their products include raw dry chili crop/fruit, chili powder, and chili seed. The proceeds and profits are directly transferred to member farmers.101

98 Ministry of Agriculture and Food Security (2007). 2006/07 Annual Agricultural Statistical Bulletin, (Lilongwe: Government of Malawi). 99 FAO Statistics. http://faostat.fao.org. 100 Ministry of Agriculture and Food Security (2008). Crop estimates data, (Lilongwe: Government of Malawi). 101 ACDI/ VOCA (2003). Malawi Farmers Find ‘Future Belongs to the Organized’ Agriculture in the Global Economy, (Washington, D.C.: Bread for the World & Bread for the World Institute).

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Figure 14: Blantyre Chili Production Estimates Year 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 Ton 1,831 1,218 1,258 1,212 1,373 1,192 924 1,045 Hectare 4,088 3,083 2,875 2,706 2,361 3,083 2,102 2,097 Ton/Ha 0.45 0.4 0.44 0.45 0.58 0.39 0.44 0.5 Source: Malawi Ministry of Agriculture and Food Security, Crop Estimates. Value Chain Analysis Production Chilies are mainly produced by smallholder farmers with very few commercial inputs. The production of chili is a labor-intensive process, as it requires hand-picking and grading.102

Processing To process as chili sauce, chilies are soaked in hot water, then pounded and ground. Next, spices are added per the sauce recipe and the mixture is steamed in wood-fired boilers. Finally, the cooled product is bottled and packed. Sub-sector Analysis: Chili Processing Processing Chili season lasts from March through August. The initial step of processing chilies consists of drying and grading the fruit on the farm. Washing, drying, and grading are the crucial steps in post-harvest handling, where quality can be most affected.103

The harvested fruit is washed in lightly chlorinated water to remove dirt and chemical residues. At the same time, a proper drying is necessary to maintain the quality of the crop.104 Grading is also a key element in the on-farm processing of chilies. It is based on specified standards for size, color, rotten stock, and foreign matter. There are two basic grades for birds eye chilies—A and B—with a price premium of about MK10105 between grades.106

Major Player: Nali Ltd. Nali is the dominant company in chili sauce production in Malawi and is located in Limbe, a few miles south of Blantyre. Nali produces bottled chili products that are sold to local and regional markets,107 and is in the process of exporting to international markets such as the US, Canada, and Europe. 108 The company foresees growth in export demand and is optimistic about expanding revenues.109

Nali currently has 150 employees. Facilities include the headquarters in Blantyre and a factory in Thyolo (about 30 miles from Blantyre). The company’s annual revenue is about MK51 million.110 About 65-70 percent of total revenues are from the chili sauce business with a production capacity of 75 percent, which

102 National Smallholder Farmers Association of Malawi (NASFAM). www.nasfam.org. 103 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 104 Ibid. 105 US$ 0.07. 106 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 107 70 percent and 30 percent, respectively. 108 Monica Khoromana-Unyolo, Nali Ltd (March 17, 2008). Personal interview. 109 Ibid. 110 US$372,000.

FDI in Blantyre Page 35 implies there is room for increasing output. 111 On the other hand, the company maintains a good relationship with farmers through a network of 5,000 members, supporting them with seeds and technical assistance.112 Opportunities Growing local and international demand provides the opportunity for investment in the chili-processing sector. Investment opportunities lie in building export-oriented chili processing facilities to create value- added products such as chili sauce. It is estimated that a chili sauce production facility requires an investment of US$1 million,113 most of which is capital cost of equipment purchases.114

There are various factors that justify investment in the chili sub-sector in Blantyre:

1. Given that storage and transport are critical stages in which quality can potentially be eroded, Blantyre is strategically situated for chili processing, as 72 percent of chili is grown in the region.115 2. There is room for growth in the market as there are very few players. Nali is the dominant company with a very large share of the chili sauce market in Malawi. Moreover, there are few foreign brands; hence there is room for competition in the industry. 3. Chili processing is a high-margin business that can enable the firm to absorb some of the costs imposed by poor infrastructure and Malawi's lack of port access. Constraints Meeting International Export Standards Exporting to the US requires compliance with Food and Drug Administration (FDA) standards. Because Malawi’s Bureau of Standards (MBS) is not internationally recognized, and does not have adequate capacity for conducting rigorous food tests, individual companies must incur costs to get their products tested in foreign labs. For instance, some of the challenges Nali faced in entering the US market were related to product testing, labeling (for nutritional information), adulteration (occurring on small-scale farms with crude drying and storage procedures or during transport), and quality-assurance auditing (maintaining documentation to confirm the time and temperature of processing at various production stages).116 Another risk associated with export is contamination by aflatoxin, which can build up during transport.117

Increasing Competition in the World Market South Africa is the dominant regional exporter of chili sauce. Therefore, Malawi will need to compete with South Africa for a share of the export market. Bandito’s Chile Co., based in Johannesburg, already exports high quality 100 percent natural chili sauces to Australia, Europe, UK, New Zealand, Canada, Japan, and the US under the “Mama Africa” brand.118 Further, Nando’s, a South African restaurant chain with its own brand of chili sauce, operates globally.

111 Monica Khoromana-Unyolo, Nali Ltd (March 17, 2008). Personal interview. 112 Edward Labuwana Kholomana, Nali Ltd. (January 17, 2008). Personal interview. 113 US$ 14,000 per machine. 114 Edward Labuwana Kholomana, Nali Ltd. (January 17, 2008). Personal interview. 115 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 116 Ibid. 117 Ibid. 118 The Bandito’s Chile Co. http://www.banditos.co.za.

FDI in Blantyre Page 36 Lack of Adequate Supply and Quality Given that many farmers are still not organized, ensuring adequate supply of chilies is a major challenge. Moreover, quality seeds are the most important input for good quality chili sauces. To secure a supply of high-quality chilies required for value-added exports, processors will need to provide seeds to farmers as Nali does, which will increase operating costs. Impact and Feasibility Assessment Impact Employment Generation The processing of chili is a labor-intensive process. Therefore, investing in chili processing facilities to increase exports of value-added chili products will also generate new opportunities for employment.

Income High profitability will allow more people to earn greater income and will bring economic security to their communities. If farmers are organized, they can further increase their incomes. For example, farmers who are members of the Zikomestso Association received 35 percent more for their chili peppers compared to nonmembers.119

Local Competitive Environment A viable business environment will encourage more farmers to produce chilies and operate more chili- processing companies. A competitive environment will increase chili production to meet the increasing international demand and will help guarantee stability in supply and price.

Linkages The use of local agricultural raw materials creates markets for non-traditional agricultural products. New partnerships will be created with more farmer associations and donors.

Feasibility Demand Factors The global exports of chili sauce in 2006 were US$4.2 billion and global imports were US$3.9 billion.120 Between 2004 and 2006, the volume of sauce imported globally grew at 8 percent per annum, while the global export market grew at 11 percent.121

Supply Factors The volume of chili production has significantly increased over the past 20 years. However, the volume has not been consistent, as it has ranged from 1,824 to 3,307 tons per year over the last decade. Additionally, chili yields in Malawi are lower compared to the world’s average yield of about 1.8 tons per hectare. For chili sauce production, daily production capacity is 787.5 liters.122 Malawian chili production needs to be larger and more stable compared to current levels to meet increasing global demand. To address the supply problem, there have been initiatives from ACDI/VOCA and NASFAM to organize and train farmers, and improve the quality of chili through the provision of seeds and technical supports.

Profitability Chili is profitable compared to other agricultural products. According to a leading manufacturer of chili sauces, the profit margin of chili sauce is about 40 percent.123

119 ACDI/ VOCA (2003). Malawi Farmers Find ‘Future Belongs to the Organized’ Agriculture in the Global Economy, (Washington, D.C.: Bread for the World & Bread for the World Institute). 120 United Nations Commodity Trade Statistics Database (UNComtrade). http://comtrade.un.org. 121 Ibid. 122 Edward Labuwana Kholomana, Nali Ltd. (January 17, 2008). Personal interview. 123 Ibid.

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5. Groundnuts Industry Analysis Industry Overview Groundnuts (also known as peanuts) have long been an important part of smallholder production in Malawi. With annual exports of about 50,000 tons, groundnuts were a major export crop for Malawi until the late 1980s.124 Until that time, the Agricultural Development and Marketing Corporation (ADMARC) of Malawi was the sole trader of groundnuts and was responsible for buying and selling the seed. However, following the liberalization of Malawi’s agricultural markets, ADMARC ceased to keep groundnut seed stocks. Consequently, farmers were forced to recycle their seeds for subsequent years resulting in the deterioration of nut quality. 125 Although international prices remained somewhat attractive, the export market collapsed between 1990 and 1999 due to quality concerns as a result of changes in shape and plant hygiene as well as changes in demand.126 Despite this decline in exports, the crop remains popular and enjoys a strong internal market. Most recently, groundnuts have re-emerged as an export crop due to an organized market through farmers associations such as the National Smallholder Farmers’ Association of Malawi (NASFAM), which promotes and markets groundnut cultivation.127

Global Market Landscape In 2005, Malawi ranked 20th in world groundnut output, producing 161,162 tons valued at US$77.9 million. 128 Regional competitors include Nigeria, Sudan and Senegal. These regional players exceed Malawi's production capacity level. The largest exporters of groundnuts include China, the US and India. In the region, South Africa and Ghana exceed Malawi in groundnut exports.

Production in Malawi The total area of groundnuts cultivated in Malawi has rapidly expanded over the past decade, from 71,586 ha in 1996 to 200,000 ha in 2006. 129 The central and southern areas, including Kasungu, Lilongwe, Machinga and Blantyre, account for over 75 percent of the total area planted. 130 Total groundnut production has significantly increased in recent years. 131 The national groundnut production was estimated to have increased from 71,586 tons during the period of 1996 – 1997 to 263,492 tons in 2006 – 2007.132 In 2004, Malawi exported 8,329 tons of shelled groundnuts, valued at US$4,109,000, making it the 17th largest exporter in the world by value.133

124 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 125 Ibid. 126 USAID (November 28, 2006). USAID’s Activities on Agriculture and Food Security in Malawi (Draft).. 127 Ministry of Agriculture and Food Security (December 20, 2007). The Agricultural Development Programme - Malawi’s prioritised and harmonised Agricultural Development Agenda: 2008-2012 (Final Draft), (Lilongwe: Government of Malawi). 128 FAO Statistics. Major Food and Agricultural Commodities and Producers. http://www.fao.org/es/ess/top/country.html;jsessionid=63FA6E23D632AB87AEBE22F5D26A29E5. 129.Development Associates, Inc (January 2003). USAID/Malawi’s SO1: Increased Agricultural Incomes on a Per Capita Basis – 1993 to 2001. 130 Malawi Investment Promotion Agency (2007). Investor’s Guide to Malawi 2007. 131 Ibid. 132 Ministry of Economic Planning and Development (2007). Annual Economic Report 2007 (Lilongwe: Government of Malawi). 133 FAO Statistics. Key Statistics of Food and Agriculture External Trade. http://www.fao.org/ES/ess/toptrade/trade.asp.

FDI in Blantyre Page 38 Figure 15: Blantyre Groundnuts Production Estimates 2002-2003 to 2006-2007

Source: Malawi Annual Economic Report 2007.

In Blantyre alone, 25,179 tons of groundnuts were produced over 26,745 ha in 2007, representing 9 percent of the total production in Malawi (see Figure 15).134 The cash value of groundnuts is generally better than most cereal crops. The average retail market price of shelled groundnuts in 2006 in Blantyre was MK 124.54,135 which is slightly higher than the national average of MK112.54.136 137 Value Chain Analysis Production Groundnuts are almost entirely produced by smallholder farmers. Due to the closure of various ADMARC facilities, there are no adequate marketing vehicles for the groundnut value chain, from small producers to small private traders who then sell to manufacturers that dominate the domestic trade of groundnuts.138

Processing Following harvest, groundnuts are first graded according to size, and then processed into roasted salted nuts, peanut butter, paste, and other products. Furthermore, groundnuts can be used for oil and the cake from oil extraction can be used for animal feed. Sub-Sector Analysis: Groundnuts Processing The cultivation of groundnuts offers potential for commercial farming given its value chain. There is no single dominating player in the groundnut-processing sector, with many small and medium size companies competing for market share. Such players include Tambala Food Products Ltd. and Rab Processors, both located in Blantyre.

Tambala is optimistic about growth in sales of groundnut-based value-added products, given high local and international demand. Also, since groundnuts have a high nutritional value—groundnuts provide amino acids, thiamin, riboflavin, protein, and niacin—they are highly sought after by food aid organizations to feed malnourished children, women and HIV-infected patients. 139 Tambala provides

134 Ministry of Agriculture and Food Security (2007). 2006/07 Annual Agricultural Statistical Bulletin, (Lilongwe: Government of Malawi). 135 US$0.88. 136 US$0.79. 137 Ministry of Economic Planning and Development (2007). Annual Economic Report 2007, (Lilongwe: Government of Malawi). 138 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 139 Rex Nyahoda, Tambala Food Products Ltd. (January 15, 2008;). Personal interview.

FDI in Blantyre Page 39 smallholder farmers with seeds and technical support to ensure product quality. Currently, 100 percent of the company’s roasted-nut products are sold entirely in the domestic market. The company provides in- flight packaged peanuts for Malawi’s national airline, Air Malawi. Supply shortage presents the biggest challenge to Tambala, as significant funding is required to secure crop supply from farmers. Tambala competes with foreign traders who also buy harvested groundnuts from the same farmers.

Rab Processors, one of the largest and most-diversified food manufacturing companies in Malawi, is also engaged in groundnut processing. According to the company, while some competitors exist for specific products, the agro-processing industry in Malawi has not yet reached a saturation point and there exists room for growth. Rab Processors obtains groundnuts supply mainly from the central region around Lilongwe.140

The market landscape is also marked by numerous small and medium enterprises that process groundnuts on a smaller scale. For example, Mbado Enterprises in Blantyre is one such small enterprise producing edible oil from groundnuts. Mbado buys groundnuts, extracts and bottles edible oil, and sells cake for stock-feed. It started in 1980 as a two-man outfit, and has now grown to employ over 30 people.141

The use of groundnut processing machineries does not require advanced skills; therefore, a majority of employees in groundnut processing companies are unskilled. Opportunities There has been support for international research-extension programs, such as the USAID-funded Groundnut and Pigeon Pea Multiplication (GPM) project conducted from 1999-2002. Significant efforts have been made to enhance high-quality seed multiplication and increase farmers’ education regarding quality specifications. Through integrated value chain development enabled by private investment, Malawi can potentially establish itself as a supplier of high-quality groundnuts.

Opportunities for investment exist in:142 • Wholesaling, grading, and quality testing for export markets; • Peanut butter production for local and regional markets; • Oil extraction for domestic and international markets.

According to NASFAM, Malawian farmers enjoy a competitive advantage in producing groundnuts, given the inexpensive inputs required to produce the crop. For example, groundnut farmers do not need fertilizers, making it cheaper to produce at a low cost, while offering higher yields.143

Substantial opportunities exist for export to the Common Market for Eastern and Southern Africa (COMESA) and the EU (particularly the UK). There is also unsatisfied demand for Malawian groundnuts from countries in the region such as South Africa, Zimbabwe and Tanzania. Access to European markets is contingent upon improvement in production, processing and handling to meet EU standards for aflatoxin contamination which must not exceed 20 ppb.144

140 Afzel Thassim, Rab Processors Ltd., (January 14, 2008). Personal interview. 141 Stewart Khondowe, Small Enterprise Development Organization of Malawi (March 17, 2007). Personal interview. 142 Malawi Investment Promotion Agency (2007). Investor’s Guide to Malawi 2007. 143 Gloria Kasongo, NASFAM (March 11, 2008.). Personal interview. . 144 Mkoka, Charles (November 7, 2007.). Purging Malawi’s Peanuts of Deadly Aflatoxin, Sci Dev Net., http://www.scidev.net/en/features/purging-malawis-peanuts-of-deadly-aflatoxin.html.

FDI in Blantyre Page 40 Investment recommendation Given some of the challenges that these corporations face, specifically the lack of financial resources, a recommendation for the groundnut sector is to invest in or partner with already existing companies such as Tambala, Mbado Enterprises and Rab Processors. Constraints Supply shortage Because the supply of groundnuts is largely dependent on smallholder farmers, the lack of consistent supply of raw materials is one of the most challenging issues associated with the groundnut sector. Hence, there is much volatility in output due to fluctuations in smallholder production. Due to market liberalization, the Government stopped guaranteeing prices, which has led to supply scarcity. To address supply constraints, Rab Processors has engaged in contract farming on a small scale. However, due to the lack of legal and contractual enforcement mechanisms, contract farming has not proven to be successful. Despite agreements between local processing companies and farmers to exchange farm inputs for supply guarantees, farmers often sell their products to other buyers that offer a better price during the harvest season.

Quality Control Management of aflatoxin—a naturally occurring toxin—is a crucial factor for exporting groundnuts. Due to the toxicity of aflatoxin levels exceeding 20 ppb found in groundnuts, the EU ceased importing from Malawi during the 1990’s. High Performance Liquid Chromatography (HPLC), which is considered to be the only internationally accepted method of aflatoxin inspection, costs around US$230 per sample that needs to be assessed. Malawi is currently testing its crops through other forms, including enzyme-linked immunosorbent assay (ELISA) kits, which can be purchased by individual farmers at about US$1.145 Impact and Feasibility Assessment Impact Employment Groundnut processing factories will generate employment opportunities. For example, Tambala employs nearly seventy personnel and Rab Processors employs an additional 1,500 workers. Groundnut processing can create employment opportunities for unskilled workers, since the use of processing does not require advanced skills.

Feasibility Demand Factors Given high demand in regional and European markets, there is potential for significant price premiums for improved grades and standards of groundnuts. Demand is highly sustainable given unsatisfied demand factors within regional and European markets. Supply Factors NASFAM has encouraged production practices that increased traditional variety yields to 700 kg.146 High quality and stable supply will depend on inputs provided by processors.

Figure 16: Linkages with the Millennium Village Project

The Millennium Villages Project (MVP) in Malawi is approximately 70 km from Blantyre and is located in the Zomba region. The MVP has embarked on the production of groundnuts as a cash crop for the purposes of selling to local companies. Commercial groundnut transactions in this region enjoy the advantages stemming from well-maintained roads. The groundnuts produced in the Millennium Village can be transported to Blantyre at low cost. Investment in groundnuts processing in Blantyre provides unique opportunities to effectively link 145the Ibid. MVP with the Millennium Cities Initiative. With strengthened financial capacity enabled by external private 146investment, USAID (November groundnut 28,-processing 2006). USAID’s companies Activities can onbuy Agriculture larger volumes and Food from Security MVP farmers.in Malawi Definitively (Draft). linking farmers to processors will provide farmers with the incentive to consistently increase production yields, which in turn can mitigate groundnut processing companies’ supply shortage issues. FDI in Blantyre Page 41

6. Macadamia Nuts Industry Analysis Industry Overview The macadamia nut is among the most important expanding cash crops in Malawi. It is often cited as a good alternative export crop. Due to the high initial investments and imported inputs necessary for production as well as a competitive world market, macadamia nuts are only a suitable export crop for estates. Grades and standards are critical in the production and processing of macadamia nuts, particularly concerning food safety and hygiene standards in processing.147

Global Market Landscape International competition is intense among major macadamia nut producers such as Australia, Hawaii, Brazil, South Africa and Kenya.148 Malawi is the third largest producer in Africa, after South Africa and Kenya. The world market price for macadamia nuts has sharply fallen since the late 1990s due to excess supply.149 Demand for macadamia nut comes especially from the UK, the US, and Japan.

Figure 17: World Macadamia Nut Production and Exports Area Trees 2003 Production (t) Kernel Kernel Country/Region (ha) (‘000) Nut-in-shell Kernel recovery (%) exports (t) Australia 15,000 5,000 30,000 9,100 32 7,460 Central America 8,700 - 17,000 3,100 18 3,100 USA (Hawaii) 7,284 1,350 27,240 4,500 25 200 South Africa 7,000 3,073 12,500 3,400 28 2,975 Kenya 6,500 1,000 8,800 1,000 16 1,000 Brazil 6,000 - 3,000 600 17 540 Malawi 5,112 1,022 4,000 1,000 25 1,000 Zimbabwe - - 900 120 - 120

Source: ISHS, Chronica horticulture, vol.45, November 2, 2005.

Production in Malawi The nuts are produced mainly in the Rumphi and Ntchisi regions, in the central and northern parts of Malawi. Macadamia nuts are produced mainly by large estates that are owned by international investment companies.150 Since production of macadamia nuts requires high initial capital investments and imported inputs, only estates with large acreage have the potential to make a profit in a highly competitive world market.151

147 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 148 International Society for Horticulture Science (June 2005). Macadamia: Domestication and Commercialisation, Chronica Horticulture. http://www.actahort.org/chronica/pdf/ch4502.pdf. 149 FAO Online (May 8, 2001). Macadamia Situation and Outlook. http://www.fas.usda.gov/htp2/circular/1999/99- 03/macadamia.htm. 150 U.S. International Trade Commission (September 1998). Macadamia Nuts: Economic and Competitive Conditions Affecting the U.S. Industry. 151 International Society for Horticulture Science (June 2005). Macadamia: Domestication and Commercialisation, Chronica Horticulture. http://www.actahort.org/chronica/pdf/ch4502.pdf.

FDI in Blantyre Page 42 Under AGOA, Malawi is one of the most notable suppliers of macadamia nuts to the United States; Malawi supplied US$2.7 million out of a total of US$54 million of macadamia imports into the US in 2003, representing 5 percent of all macadamia imports.152

The low cost of production and high quality of the product makes Malawi an attractive supplier of this crop.

Value Chain Analysis Production After harvest, macadamia nuts are stripped of their husks by a dehusker, and the kernels are separated from the shells by steel rollers that exert a pressure to crack the shells without damaging the inside kernels. Then the kernels are sorted out and graded by color while quality control inspectors observe their flow by hand. Raw kernels are packed directly in cans or boxes, while kernels to be roasted are separated and coated in coconut oil.153

There are five companies engaged in the production of macadamia nuts in Malawi, including Sable Farming, which is located in Limbe, near Blantyre, and Namingomba Tea Estates Ltd., in the south near Blantyre. Sable Farming owns 883 hectares of land for macadamia nut cultivation. Combining its two factories in Limbe and Mzuzu, the company produces about 400 tons of macadamia nuts per annum.154

Processing The nuts can be used for a multitude of purposes: they can be eaten raw, roasted as snacks, and used as ingredients for confectionery products.155 In addition, oil extracted from macadamia nuts as a byproduct can be used as household cooking oil and in cosmetics manufacturing. Sub-Sector Analysis: Macadamia Nuts Processing According to MIPA, three world class nut processing factories are currently operating as a result of recent investment.156 Sable Farming conducts only simple processing including cracking, washing and drying, and exports almost all of its products in a semi-processed form. A kilogram of nuts fetches between US$3 – US$8, depending on the quality of the crop on the retail market.157 Sable farming employs 2,500 mostly unskilled farmers from various villages. A visit to one of Sable’s factories revealed that a high standard of quality control is being ensured through manual labor.158 Low labor costs are keeping production costs low compared to local competitors. Opportunities Given the high value of the macadamia nut, more foreign investment is being sought to boost the production and processing of raw materials. Opportunities for investment exist in commercial macadamia estates.159 Partnership with foreign investors will increase productivity of local estates through transfer of better technology, expansion of acreage and access to capital for machineries and equipment, including

152 U.S. Department of Agriculture, Foreign Agricultural Service (March 2004). World Horticultural Trade & U.S. Export Opportunities. http://www.fas.usda.gov/htp/Hort_Circular/2004/04-02- 04%20Web%20Art/2004%20Macadamia%20Situation%20and%20Outlook%20in%20Selected%20Countries.pdf. 153 Enotes, Macadamia Nut, Available: http://www.enotes.com/how-products-encyclopedia/macadamia-nut. 154 Lalit Khatri, Sable Faming Co. Ltd.,. Personal interview, January 17, 2008. 155 Malawi Investment Promotion Agency. 156 Ibid. 157 Nyasa Times, Americans scramble for Malawi nuts, April 21, 2007, Available: http://www.nyasatimes.com/index.php?news=620. 158 Lalit Khatri. Sable Faming Co. Ltd.,. Personal interview, January 17, 2008. 159 Malawi Investment Promotion Agency.

FDI in Blantyre Page 43 macadamia-planting machines, which cost approximately US$1.5 million.160 Furthermore, development of commercial estates could also generate employment opportunities for small farmers by hiring them on an on-going basis. Constraints Supply Shortage Inadequate supply is the biggest constraint in the macadamia nut industry. While smallholders are incapable of meeting grades and standards that are required for exports, there are few estates that have large enough land to benefit from economies of scale.161 Sable Farming’s factories have more production capacity than current levels. However, due to the lack of raw materials, the company is unable to produce more.

Long-term Investment Since it takes eight years for a macadamia nut tree to grow and high levels of fixed investment and inputs are required, there is a large lag-time between investment and production. Furthermore, young trees are more vulnerable to diseases and pests than older, more established trees.

Costs Associated with Value-addition The lack of domestically produced packaging materials and high transportation costs make value-addition within Malawi more costly. Since value-addition has high costs associated with transport and handling, it is more profitable to export semi-processed raw nuts and leave further processing for the destination markets. Impact and Feasibility Assessment Impact Employment There are limited employment opportunities, as there are only five companies engaged in macadamia nut production. While it depends on the size of an expansion, the potential for employment generation is not very large, given the limited land availability.

Skill Set Most labor does not require a high-level skill set. For example, Sable Farming employs mostly unskilled farmers from villages, some semi-skilled labor and few skilled laborers who are engaged in research and mechanical operations. If the production or processing of macadamia nuts is expanded, it is most likely that companies will increase the number of unskilled workers. Therefore, the impact that an investment can bring to the workers is limited.

Feasibility Demand Factors While there was growing demand from the 1980s until the mid-1990s, keeping prices stable, world prices fell in the late 1990s, as supply stocks overtook demand.162

Supply Factors The crop is mainly produced by estate holdings, as production of macadamia nuts is difficult for smallholders in terms of grades and standards. Thus, the supply shortage is a problem.

160 Lalit Khatri. Sable Faming Co. Ltd.,. Personal interview, January 17, 2008. 161 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development). 162 US International Trade Commission (September 1998). Macadamia Nuts: Economic and Competitive Conditions Affecting the U.S. Industry.

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Enabling environment AGOA offers duty and quota-free access to the US macadamia nut market.

Profitability Initial investment is high and there is a lag-time between investment and production (it takes eight years before payback). Based on the research by Mataya and Tsonga, the return per hectare is said to be MK 10,274 163 while the farm gate price is MK 270.00164 per kg, and the margin after labor cost is MK 21,236,165 which is higher than other major crops such as maize, cassava, groundnuts and cotton.166

163 US$74.9. 164 US$1.97. 165 US$155. 166 Mataya, Charles S. and Ernest W. Tsonga (2001). Economic Aspects of Development of Agricultural Alternatives to Tobacco Production and Export Marketing in Malawi Analytical Studies on Trade, Environment, and Development No. 7, (Geneva: United Nations Conference on Trade and Development).

FDI in Blantyre Page 45 IV. Conclusion and Recommendations

"Current opportunities exist…however for further development to occur, government incentives and job training are necessary. The labor force is trainable and labor cost is low compared to South Africa and China."167

Malawi faces significant challenges to developing a vibrant private sector to sustain its economic growth. However, a stable political environment, recent macroeconomic stability, and improved external trade terms have been positive developments for one of the world’s poorest countries. Moreover, Malawi's historic agricultural production record, marked by high yields in the cotton sector, demonstrates that the country has the potential for sustained economic growth, if given the right impetus through sound economic policy.

An infusion of foreign direct investment has the potential to improve the livelihoods of the country's inhabitants by creating employment opportunities, diversifying the economy and developing the private sector. With a view to encouraging FDI in the promising sectors identified and alleviating the constraints that hamper the growth of these sectors, the authors provide the following recommendations:

• Identify investors for High Feasibility-Impact sector investment opportunities;

o Textile manufacturing factories • Advocate for the alleviation of supply-side bottlenecks;

o Strengthen the capacity of farmer associations, such as NASFAM o Establish industry cooperatives to stabilize markets for each sector o Strengthen contract enforcement • Support institutional capacity building of key agencies, such as MIPA, MBS and MEPC; • Establish stronger linkages between MPV and MCI; and • Encourage partnerships with development agencies and NGOs involved in value-added agricultural processing projects. Identify Investors Based on the Investment Evaluation Framework, the authors identified textile manufacturing as a High Feasibility-Impact sector investment opportunity. Value added products such as textiles not only command higher prices in the world market, but also generate many other positive spillovers in the country, such as technology and skills transfers. Given the fact that Blantyre is the commercial center of Malawi, the city is well positioned to take advantage of many of the complementary industries located in the city.

Potential foreign investors may include both partnerships as well as financial investors from the region and outside the continent. It is ideal to seek investors with significant experience in the sector to bring expertise to existing operations or new projects. Furthermore, someone with a longer-term investment horizon is ideal, because the payback period is likely to be long. Also, adding a technical assistance component through an NGO or donor should be considered, given the large presence of these organizations in the country and their contribution to date (see “Encourage Partnerships with Development Agencies and NGOs” below).

167 K.K. Desai, Knitwear Industries (January 14, 2008). Personal interview.

FDI in Blantyre Page 46 Advocate for the Alleviation of Supply-side Bottlenecks Among the processing companies interviewed, most agreed that the unreliability and scarcity of commodity inputs adversely affects the way business is conducted, precluding companies from fulfilling larger orders in a timely fashion. The authors propose the following:

Strengthening of the capacity of farmer associations: Farmer associations have the potential to empower farmers and support the growth of agricultural commercialization. MCI should liaise with donors and farmer associations to identify any possible investment opportunities or linkages in Blantyre. Because the recommended sectors are in agricultural value-added products, it is in the Earth Institute’s best interest to connect the processing facilities to organized farmers to ensure consistent quality and quantity.

Establishment of industry cooperatives: Given the complexity and fragmentation of various industry value chains, each sector must deal with significant information asymmetry that destabilizes the market. In the case of Malawi’s cotton sector, which lacks vertical integration, the establishment of a National Cotton Council would help align incentives among various industry stakeholders. Although there are numerous sub-sector associations like the Garment and Textile Manufacturer's Association (GTMA), and the Cotton Developer's Association (CDA), a sector-wide association is lacking. MCI could potentially serve as a facilitator that brings representatives from these major groups together.

Strengthening of contract enforcement: For the private sector to function effectively, there must be strong contract enforcement. In Malawi, contracts between smallholder farmers and their respective buyers are not honored in many cases, which deter the formation of strong farmer-market linkages. This ultimately increases production costs for the processing companies, and results in reduced profitability. MCI should continue to collaborate with the Government and international organizations to assess how the capacity of judicial institutions and other bodies overseeing contract enforcement can be strengthened. Support Institutional Capacity Building of the Key FDI Institutions MIPA, MBS, and MEPC in Blantyre are vital resources for potential investors. However, limited resources affect their ability to market potential investment opportunities and reach out to investors. The World Bank's Business Environment Strengthening Technical Assistance (BESTAP) project is attempting to reduce redundancies, improve information technology infrastructure, and build capacity among staff. MCI can play a vital role in building the capacity of these key institutions. Establish Stronger Linkages between MVP and MCI There should be a conscious effort to establish economic synergies between MCI and MVP which, at the moment, seem relatively limited. This synergy can be an effective vehicle for promoting farmer-market linkages. MVP’s Science Coordinator, Rebbie Harawa, and her team have conducted feasibility studies on the commercial opportunities of the various crops grown in the Millennium Villages. MCI should work closely with the MVP team and use the existing feasibility studies as a guide for identifying potential linkage opportunities. Encourage Partnerships with Development Agencies and NGOs Many organizations, including the UK’s Department for International Development (DFID), USAID, the Clinton Hunter Development Initiative, and Console International, are actively conducting development projects in Malawi aimed at processing agricultural products. It is also likely that some of the identified investment opportunities may require technical assistance in addition to investment, which can be provided by the various development agencies and NGOs operating in Malawi. MCI should seek collaboration with such agencies that have prior experience in Malawi in order to better understand the market and to identify potential investors.

FDI in Blantyre Page 47 Appendix I. Sectors with Limited Investment Potential 1. Banking Industry Analysis Industry Overview The commercial banking sector in Malawi is comprised of leasing companies, finance companies, development institutions, savings banks and numerous insurance companies. According to the United Nations Capital Development Fund (UNCDF), the Government of Malawi has taken steps to improve the climate for a viable financial industry. These steps include liberalizing the sector, reducing interest rate controls, lowering bank reserves, and removing exchange regulations on capital flows.168 The Government has also taken steps to improve the regulatory framework to attract private investors. The Companies Act and the Capital Market Development Act are examples of functioning regulatory structures set in place to promote such investments in Malawi.169 Financial sector reforms have resulted in the entry of several international financial institutions into the banking sector.170 Moreover, the Government has shown substantial flexibility in relaxing equity-ownership rules for the banking industry: foreign banks are allowed to own a 100 percent stake in their Malawian counterparts.

Major financial institutions include the National Bank of Malawi, Standard Bank, First Merchant Bank, Opportunity International Bank of Malawi, INDEbank, Ecobank (formerly Loita Investment Bank), Malawi Savings Bank, Nedbank Ltd., NBS Bank (formerly New Building Society) and FDH Bank.171 Standic Bank is 60 percent owned by South Africa’s Standard Bank, while other foreign-operated banks own nearly 50 percent of the banks’ total assets.172

Investments in financial services are also being made by the nonprofit sector. The United Nations Development Program (UNDP), UNCDF, and the Government of Malawi have partnered to increase financing services to Malawians particularly in the area of micro-finance.173 In June 2007, the Financial Inclusion in Malawi (FIMA) project—a micro-finance initiative—was implemented in an effort to provide services for poor and low-income communities. This initiative will also develop an overall strategy to strengthen the capacity of the financial services industry.174 According to the UNDP, only 3 percent of Malawi’s population has access to credit. To provide services for the rural population, the Malawi Rural Finance Company Limited (MRFC) was established in 1994. The MRFC is 100 percent owned by the Government of Malawi. Opportunities Small and Medium-sized Enterprise (SME) Lending While the banking services market has reached saturation, the biggest business opportunity in the banking sector lies in Small and Medium-size Enterprise (SME) lending. Although there is a need for rural microfinance, many banks are hesitant to take risks associated with financing at the micro level. The only bank in Malawi that provides micro-finance is the Opportunity and Investment Bank of Malawi (OIBM). Constraints Market Saturation and Increased Competition There are currently eight commercial banks (with two additional banks expected to enter the market in the near future), two discount houses, one leasing corporation, one investment bank, one savings bank and

168.UNCDF. http://www.uncdf.org/english/index.php. 169 US Department of State (2007). 2007 Investment Climate Statement - Malawi. http://www.state.gov/e/eeb/ifd/2007/80721.htm 170 KPMG (2004). Banking Survey Africa 2004. http://www.kpmg.co.za/images/naledi/banking%20africa%202004.pdf. 171 Ibid. 172 Ibid. 173 UNDP Malawi. Microfinance: Financial Inclusion in Malawi (FIMA). http://www.undp.org.mw/isc.html 174 Ibid.

FDI in Blantyre Page 48 fourteen microfinance institutions in Malawi.175 Consolidation of banks has not yet taken place and there are too many banks in Malawi considering the size of the country.

Figure 18: Number of Licensed Institutions in Malawi Institution Type No. of Institutions Commercial Banks 8 Discount Houses 2 Building Societies 1 Leasing Companies 2 Savings Banks 1 Majority State-owned (number) 2 As a Percentage of Total Assets 35 Majority Foreign-Controlled (number) 6 As a Percentage of Total Assets 46 Asset Share of the Two Largest Banks 58 Deposit Share of the Two Largest Banks 59 Net Income of the Two Largest Banks 71

Source: UNCDF.

Macro-economic environment The overall macro-economic environment has not been favorable for foreign direct investment in the financial services sector. The economy suffers from high interest rates, inflation rates, and macroeconomic instability.176 Most recently, interest rates have declined but still remain high at 25.5 percent in 2008 (IMF estimate) and 25.0 percent in 2009 (IMF projection) as shown below.177 Thus, the cost of borrowing for many is cost-prohibitive as compared to neighboring South Africa where the 2009 projected interest rate is 13.5 percent.178

Figure 19: Interest Rates 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Lending rate (%) 53.6 53.1 56.2 50.5 48.9 36.8 33.1 32.2 27.1 25.5 25.0 Deposit rate (%) 33.2 33.3 35.0 28.1 25.1 13.7 10.9 11.0 5.9 3.5 3.0 91-day T-bill (%) 42.9 39.5 42.4 41.7 39.3 28.6 24.4 19.3 13.9 13.5 13.0 Source: IMF, International Financial Statistics. Notes: 2008 figures are estimates. 2009 figures are forecasts.

2. Coffee Industry Analysis Industry Overview Arabica coffee, a premium variety of coffee, is the fourth most important export crop in Malawi. Exports are made to European, Asian and American markets.179 The country’s traditional buyers have been the Netherlands, the UK, Germany and South Africa.180

175 US Department of State (2007). 2007 Investment Climate Statement - Malawi. http://www.state.gov/e/eeb/ifd/2007/80721.htm. 176 Ibid. 177 Economist Intelligence Unit. EIU DataServices. https://eiu.bvdep.com/frame.html. 178 Ibid. 179 Malawi Confederation of Chamber of Commerce and Industry (2008). Agricultural Sector Business Opportunities in Malawi. 180 Semu-Banda, Pilirani (November 21, 2007). TRADE-MALAWI: Coffee Industry Gets Brewing Again, IPS News. http://www.ipsnews.net/news.asp?idnews=40149.

FDI in Blantyre Page 49 Coffee is produced in more than fifty countries in the world. Three countries—Brazil, Colombia, and Vietnam—account for almost 60 percent of world production. Malawi is a minor producer in the world coffee market, producing less than 0.02 percent of total world production. However, coffee is still a significant foreign-exchange earner for the country. Production has been declining for a number of years due to a combination of world and local factors, including unpredictable market prices of coffee, escalating input costs and frequent droughts.181

Production Malawi coffee is 100 percent Arabica, which usually grows at an elevation above 950 meters. Coffee is grown mainly in the north and in the southeast of the country, with little production in the central region. In the south, coffee is grown only by commercial farms/estates (no smallholder production) and is mainly centered around Thyolo (30 miles from Blantyre) and Zomba (38 miles from Blantyre). In the north, coffee is predominately grown by smallholder farmers in associations affiliated with the Mzuzu Smallholder Coffee Farmers Trust (SCFT) and by two small farms around Mzuzu. The profile of the coffee sector is therefore completely different between the north and south.182 Value chain Farmer Organizations There are two main categories of coffee growers in Malawi: commercial farms/estates, and smallholder farmers. In Malawi there are currently fifteen active organizations that grow coffee: fourteen commercial farms/estates and the Mzuzu Trust, which is comprised of five associations of smallholders. Three growers/processors—Sable, Makandi, and Mzuzu SCFT—account for more than 75 percent of the estimated production in 2006.183

Since 2007, the Coffee Association of Malawi (CAMAL) has managed to attract buyers from Switzerland, the US, Canada, and Japan. To push for increased market awareness of the superior quality of Malawi’s coffee, CAMAL has joined forces with MIPA, the United Nations Development Program’s Growing Sustainable Business (GSB) program, and the United States Agency for International Development (USAID).184 Opportunity To boost production, the Government has privatized the Smallholder Coffee Trust in Mzuzu, which empowers smallholder farmers to control coffee production. Thus, opportunities for investment exist in the form of joint ventures with organizations engaged in the production and processing of coffee.185

Increasing consumption of higher-priced specialty coffee worldwide provides opportunities to growers willing to invest in their coffee crop. Although Malawi has some very good grades of coffee, not all of them qualify as specialty grade, which relegates the sale of crops to the bulk mainstream market.186 This strategic choice depends to a considerable extent on each producer and their willingness to seek specialty sale and to make the required investment.

181 USAID (November 2006). Credit Demand and Supply Study of Malawi’s Coffee Sector. 182 Ibid. 183 Semu-Banda, Pilirani (November 21, 2007). TRADE-MALAWI: Coffee Industry Gets Brewing Again, IPS News. http://www.ipsnews.net/news.asp?idnews=40149. 184 Ibid. 185 Malawi Confederation of Chamber of Commerce and Industry (2008). Agricultural Sector Business Opportunities in Malawi. 186 USAID (November 2006). Credit Demand and Supply Study of Malawi’s Coffee Sector.

FDI in Blantyre Page 50 Constraints Low and Volatile World Market Price Malawi has predominantly supplied beans into the high-volume market segment and has suffered considerably from low and volatile world-market prices since 1989 (following the collapse of the International Coffee Agreement) and continued world oversupply. The result has been a progressive decline of coffee growing in Malawi with growers leaving the industry or reducing their level of production. Furthermore, the financial sector generally has a negative perception of the opportunities in the coffee industry, which translates into a reluctance to provide credits.187

Poor Road Infrastructure The poor state of infrastructure, especially roads and bridges, was listed as a major constraint to the development of the smallholder coffee industry. During the rainy season (up to six months of the year), some coffee growing areas are difficult to reach or even inaccessible by motor vehicle.

The end result is a significantly higher cost of production (higher transport cost, vehicle maintenance, etc.) for coffee. The cost associated with the movement of components of the industry’s supply chain is prohibitive.188

3. Dairy Industry Analysis Industry Overview Intensive smallholder dairy production in Malawi commenced in 1969. The Government at the time organized farmers into Milk Bulking Groups (MBGs) and established several milk processing plants through the Malawi Milk Marketing (MMM) project. MBGs would purchase milk from members and sell it to a MMM farm located in Blantyre, Lilongwe, or Mzuzu. In 1985, the MMM project was reorganized and a statutory body—Malawi Dairy Industries (MDI)—took over the three MMM dairy plants and farms and were given the mandate to operate on commercial lines. In 1997, the six MDI factories and farms were privatized. As a result, three private dairy processing companies were established in each region of Malawi: Dairibord in Blantyre, New Capital Dairy in Lilongwe, and Northern Dairy Industries in Mzuzu. Since then, two new private investors – Suncrest Creameries in Blantyre and Lilongwe Dairy in Lilongwe – have started operating in the dairy industry.189

The Malawi dairy industry represents a very small part of the livestock sub-sector and agricultural sector. Malawi has about 4,000 registered dairy farmers producing approximately 6,500 tons of milk annually.190 There is also the informal market that sells raw milk directly to consumers for home consumption, which is estimated at 27,000 tons.191

As shown in Figure 20, the local supply of fresh milk from both informal and formal sectors only meets about 60 percent of demand.192 Therefore, the dairy industry relies on imported milk powder, which covers 90 percent of the unmet demand.193 South Africa is the major country of origin for milk powder in addition to Denmark, the Netherlands, Italy, New Zealand, Argentina and Australia.194

187 Ibid. 188 Ibid. 189 Imani Development Consultants (June 2004). Review of the Dairy Industry in Malawi (Nairobi: RATES Center). 190 Malawi Investment Promotion Agency (MIPA). Priority Sector for Investment: Agriculture/Agro-processing. http://www.malawi-invest.net/inves_opp_agri.html 191 Imani Development Consultants (June 2004). Review of the Dairy Industry in Malawi (Nairobi: RATES Center). 192 Ibid. 193 Edwin Chilundo, Dairibord Malawi (Private) Limited (March 19, 2008). Personal interview. 194 Imani Development Consultants (June 2004). Review of the Dairy Industry in Malawi (Nairobi: RATES Center).

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Figure 20: Milk Production Estimates Source Total Quantity % Liters/Day equivalent Formal 6,500 13 17,808 Informal 27.000 50 73,972 Imports 20,000 37 54,794 Total 53,500 100 146,752 Source: Imani Development Consultants.

Malawi’s milk consumption in 2002 was 4.7 kg/capita/year as indicated in Figure 21, in comparison to an African average of 15kg/capita/year.195 This shortfall underlines the opportunity for investment in the industry.

Figure 21: Milk Consumption per Capita in Malawi (kg) Year 1990 1995 1996 1997 1998 1999 2000 2001 2002 Whole Milk Consumption 5.2 3.7 4.0 4.2 4.0 3.9 3.6 3.6 4.7 Source: FAO Database, 2005. Value Chain Generally, farmers that join MBGs (i.e. with a tank and cooling facility) are serviced by processing companies on a daily basis. The processed products are then distributed to the wholesalers and retailers to be sold primarily to urban consumers. Rural consumers purchase raw milk directly from the informal sector. Additionally, imported powdered milk is used by producers to supplement raw milk while imported dairy products such as long-life milk are sold directly to wholesalers and retailers.

Production The dairy industry is better developed in the south of the country. Of the three Milk Shed Areas (MSAs) in Malawi, around 80 percent of formal milk is produced in the Blantyre milk shed. The Shire Highlands area, a plateau in the south with an area of about 2,800 square miles, is said to be suitable for smallholder dairying with good feed resources, a favorable climate, and a relatively low disease challenge to dairy cattle.196 The milk collection network is also well developed in this area and it provides farmers with a convenient selling point and thus a valuable asset.197

Twenty MBGs are registered and all are organized through the Southern Highlands Milk Producers Association (SHMPA). Altogether 2,700 smallholder farmers are registered into twenty-one MBG’s. The average MBG delivers around 528 liters of milk per day equal to 12,157 total liters per day. Average total milk collection per day in Blantyre MSA has increased from 9,201 liters per day in 1998 to 12,157 liters per day in 2004. 198 However, individual farmers produce on average about 7 liters per day, while commercial farmers have the potential to produce up to 40 liters per day.199

Processing Two of the five major dairy processing companies, Dairibord and Suncrest Creameries, are located in Blantyre. Apart from these five companies, some smaller scale processing units are active around the major cities.

195 Ibid. 196 Encyclopædia Britannica Online (2008). "Shire Highlands," (Chicago: Encyclopædia Britannica, Inc.). 197 Imani Development Consultants (June 2004). Review of the Dairy Industry in Malawi, (Nairobi: RATES Center). 198 Ibid. 199 Edwin Chilundo, Dairibord Malawi (Private) Limited (March 19, 2008). Personal interview.

FDI in Blantyre Page 52 Because local producers are only able to produce 60 percent of the requirement of the processing industry, the processing companies are forced to import milk powder to meet demand, raising the cost for some processors. As a result, the utilization rate of the dairy industry is as low as 26 percent, causing severe financial problems for some companies.200 The retail milk price is about MK115 – 120201 per liter, while powdered milk is significantly more expensive at MK 848202 per kg. Raw milk sold directly by farmers is much cheaper.

In addition, due to bilateral free trade agreements, dairy products from Zimbabwe enter Malawi at very competitive prices. This also causes unfair competition against local producers as processors have to pay a surtax on packing materials whereas imports are duty free and exempt from the surtax.203 In addition, many of the value-added products are imported from South Africa.204

Recently, a Dairy Processing Association has been created to increase collaboration among Malawian dairy processors. This association is currently headed by Dairibord.205

Major Market Player: Dairibord Malawi (Private) Limited Dairibord, established in 1998, is 60 percent owned by Dairiboard Zimbabwe Ltd.; the remaining ownership stake is equally shared between the Malawian Government through the National Investment Fund (20 percent) and by the employees of Dairibord (20 percent). Dairibord manufactures a wide variety of dairy products including short- and long-life liquid milk, fresh cream, powdered milk, cheese, butter, yoghurt, and ice cream. Dairibord has annual revenues of about MK1.2 billion206 and employs around 160 people. It has 60 – 65 percent of the market share in Malawi and 80 percent of the market share in Blantyre.207 Dairibord has the capacity to process 40,000 – 50,000 liters, though only 38 percent of its capacity is currently being used.208 Opportunity Investment opportunity in the dairy sector is limited. Many of the opportunities suggested included cattle breeding, feed growing and feed production. Technical assistance on artificial insemination may require funding from donors rather than private investors. Constraints There was a deficit of approximately 25.6 million liters of milk in 2006. Given the fact that many Malawians cannot afford to buy milk, there is a business opportunity to increase consumer access to high- protein dairy products at a lower price. However, due to many of the constraints mentioned below, most of the investment opportunities are for donors (and not private sector investors) to improve milk production yields through cattle breeding, feed production, technical assistance (artificial insemination), and increasing access to finance.209

For example, USAID is encouraging smallholder farmers to diversify into dairy production, a very lucrative business in Malawi and well-suited to Malawi's limited land area. USAID grantee Land O' Lakes (LOL), partnering with World Wide Sires (WWS), continues to promote the growth of the dairy

200 Imani Development Consultants (June 2004). Review of the Dairy Industry in Malawi (Nairobi: RATES Center). 201 US$0.84 – 0.87. 202 US$6.19. 203 Imani Development Consultants (June 2004). Review of the Dairy Industry in Malawi (Nairobi: RATES Center). 204 Ibid. 205 Edwin Chilundo, Dairibord Malawi (Private) Limited (March 19, 2008). Personal interview. 206 US$8.8 million. 207 Imani Development Consultants (June 2004). Review of the Dairy Industry in Malawi (Nairobi: RATES Center). 208 Edwin Chilundo, Dairibord Malawi (Private) Limited (March 19, 2008). Personal interview. 209 Imani Development Consultants (June 2004). Review of the Dairy Industry in Malawi (Nairobi: RATES Center).

FDI in Blantyre Page 53 industry in Malawi through 55 dairy associations with over 6,376 members (46 percent of which are women). 210

Low Productivity and Efficiency The average milk production per day in Malawi is estimated at 5.7 liters per cow. Smallholder productivity is still very low mainly because of limited knowledge and the lack of critical inputs such as feeds and artificial insemination. Factors that cause low productivity and slow herd growth are: lack of good animal husbandry practices, long calving intervals, lack of good quality feed, and insufficient veterinary, artificial insemination and extension services.211

Because of the low production level, many of the processing companies are operating at a low-capacity level of about 30 percent.

Lack of Cattle The dairy sector suffers from a limited number of cows. This is partly caused by farmers’ decision to abandon investing in cows due to rampant theft many years ago and the high costs associated with maintenance of cows.212 The Government of Malawi is importing about 5,000 cows annually; the Clinton Hunter Development Initiative is launching a new project to address this issue.213

Access to Capital Smallholder dairy farmers are considered risky borrowers. Increasing access to capital can help farmers access inputs to increase their productivity.

Demand Despite growing demand, the price of milk continues to be prohibitively expensive for the average Malawian household, making it a luxury consumption item. Moreover, a high percentage of households in Malawi do not have refrigeration facilities to store fresh milk.

4. Tea Industry Analysis Industry Overview Malawi was the first country in Africa to grow tea on a commercial scale. Tea production started in the Mulanje region in the 1880s.214 Tea is the second most important export crop for Malawi and it represents 7.9 percent of total export earnings. Tea is exported to European, Asian and American markets.215 In 2006, Malawi exported 43,990 tons of tea, equivalent to US$49.5 million, or around 4 percent annual world exports.216

In terms of crop size, Malawi is the second largest producer of tea in Africa after Kenya, producing medium grade teas of which specialty buyers have limited interest.

FAO projects world black tea production to grow at 1.9 percent annually over the next 10 years reaching 3.1 million tons; world green tea production is expected to grow at a faster rate of 4.5 percent annually

210 US Department of State, Bureau of African Affairs (October 2007). Background Note: Malawi. http://www.state.gov/r/pa/ei/bgn/7231.htm. 211 Imani Development Consultants (June 2004). Review of the Dairy Industry in Malawi (Nairobi: RATES Center). 212 Martin B.W. Banda, USAID (March 11, 2008). Personal interview. 213 Edwin Chilundo, Dairibord Malawi (Private) Limited (March 19, 2008). Personal interview. 214 Butler, Reg (March 20, 2005). "Africa tea faces over-production", Tea & Coffee Trade Journal. 215 Malawi Confederation of Chamber of Commerce and Industry (2008). Agricultural Sector Business Opportunities in Malawi. 216 United Nations Commodity Trade Statistics Database (UNComtrade). http://comtrade.un.org.

FDI in Blantyre Page 54 reaching 1.57 million tons. In terms of consumption, black tea demand is projected to reach 2.8 million tons, indicating an oversupply of about 300,000 tons as strong consumption growth in producing countries is unlikely to offset declines in traditional net import markets.217

Figure 22: World and Malawi Tea Price Trends

Source: FAO.

Since 2006, the oversupply of tea that had persisted for many years started waning. According to an FAO report, world tea prices were expected to maintain their upward trend in 2008 as a result of tight supply on the world market caused by a projected 10 percent decrease in Kenyan production that resulted from the political instability that occurred early in the year. 218 Tea exports from India, the second largest producer in the world, was reported to have risen about 10 per cent in 2008, due to the lower output from Kenya and higher prices. Output, on the other hand, rose about four per cent.219

Production Today, large commercial estates account for 93 percent of tea production, with the remainder produced by 6,500 smallholder growers. Most of the estates are based in the districts of Mulanje and Thyolo, with ownership concentrated among 11 companies, of which the largest is Eastern Produce Malawi (EPM) which owns and operates twenty-one estates. The major shareholder in EPM is Kenya-based Linton Park Plc. The development bank, Industrial Development Corporation of South Africa, is a minority shareholder.220

Many of the estates work closely with smallholder tea growers providing them with fertilizers and other inputs. The provision of credit by the estates is critical to ensuring good and consistent quality and quantity from growers.

Roughly one-third of Malawi's crop is sold by means of a local auction—the Limbe Auction—with two- thirds sold directly. A high proportion of the tea is bought by major international companies such as Unilever and Lyons Tetley. The biggest export destinations are the UK and South Africa.

217 FAO News (February 14, 2008). Tea prices to maintain upward trend in 2008. http://www.fao.org/newsroom/en/news/2008/1000784/index.html. 218 FAO. Championing the cause of cassava http://www.fao.org/NEWS/2000/000405-e.htm. 219 The Hindu (February 09, 2009). "Tea exports rise 10 pc in 2008; output up 4 pc", (New Delhi). 220 Butler, Reg (March 20, 2005). "Africa tea faces over-production", Tea & Coffee Trade Journal.

FDI in Blantyre Page 55

The two major Malawian tea brokers are Tea Brokers Central Africa Ltd. and Tea & Commodity Brokers Ltd. Purchasing tea locally is often difficult given the presence of international companies (e.g. from the UK) that purchase tea in bulk at local auctions. The tea price increased in 2008 due to the reduction in supply caused by the political instability in Kenya.221

Processing Malawi’s major tea processing companies are: the Mulli Brothers-owned Chombe Tea (focused on high quality tea), Rab Processors (which targets rural areas), Mateco, Mygold (a relative newcomer into the market), and Mulli Brothers (a new market entrant). International competition includes South African brands such as Five Roses. Foreign companies often purchase tea from Malawi, export it to South Africa, blend and package it, and then import it into Malawi at a premium price.222

The production process flow is as follows: 1. Purchase processed tea in paper sacs from the auction or the tea estates; 2. Blend tea manually; and 3. Package tea using machines.223

Company Profile: Chombe Tea Chombe Tea was established fifty years ago, and is currently entirely owned by Press Corporation, the largest conglomerate in Malawi, with interests in finance and manufacturing, among others. The tea was blended and packed by Tambala Foods, a subsidiary of Press Corporation Limited. In 2004, the latter sold Tambala Foods with all its brands except Chombe Tea. Chombe Tea was maintained as a subsidiary from Press Corporation and currently has 42 employees. In 2007, the company produced about 360 tons of tea and generated about MK150 million224 in sales.225

Chombe Tea has three product lines: Export Quality, 226 Economy, 227 and Leopard.228 It currently has about 65 percent of the total market share in Malawi.229 The company does not own any tea farms and purchases processed tea through auction (60 – 70 percent) or private sale (30 – 40 percent). Chombe Tea has the capacity to blend 3,000 kilograms daily. The company does not face a capacity constraint even if export quantities substantially increase.230

Press Corporation had been unsuccessful at attracting a joint venture partner. Consequently, Chombe Tea was recapitalized and Press Corporation injected new funds to enable the purchase of new production machinery and the provision of working capital. The company invested in full automation of all its product lines, new corporate branding, new packaging for all of its product lines, and the introduction of new product-tagged tea bags.231

Currently, Chombe Tea sells its products mainly for local consumption. The company views exports as a major area of growth and plans on increasing its exports to contribute 40 percent of total production

221 FAO News (February 14, 2008). Tea prices to maintain upward trend in 2008. http://www.fao.org/newsroom/en/news/2008/1000784/index.html. 222.Yvonne M. Chikwiri, Chombe Tea (March 20, 2008.). Personal interview. 223 Ibid. 224 US$1.1 million. 225 Yvonne M. Chikwiri, Chombe Tea (March 20, 2008.). Personal interview. 226 Constitutes 70 percent of total company revenues. 227 Constitutes 40 percent of total sales volume. 228 Targets the low income segment. 229 Yvonne M. Chikwiri, Chombe Tea (March 20, 2008.). Personal interview. 230 Ibid. 231 Press Corporation. Chombe Tea. http://www.presscorp.com/index.php?module=htmlpages&func=display&pid=5.

FDI in Blantyre Page 56 volume. The new market that the company is contemplating exporting to is Zambia (where currently an established tea brand does not exist), South Africa, Mozambique, and possibly Europe.232 Opportunity Investment opportunity in the tea sector is limited. MIPA recommends investment in 'new' high-yielding clonal varieties to improve quality and productivity as well as in irrigation infrastructure, which can significantly increase yields. However, these investments are more likely to be conducted by donors.

One potential area of investment is refurbishing existing tea processing facilities and the construction of new tea processing facilities for export purposes. Opportunities exist particularly in the production and processing of green tea for East Asian markets and other specialty herbal teas. Constraints Lack of Value Addition Much of the tea produced in Malawi is sold in auctions for export only to be imported back into Malawi in processed form for consumers. Many of the players in the value chain, ranging from smallholder tea growers to estates, are currently not able to take advantage of extensive contribution margins due to the lack of value addition.

Transportation Cost Transportation costs related to exporting tea are a major issue for processing companies since Malawi is landlocked and infrastructure is limited. Targeting neighboring countries instead of Europe or the US may mitigate this issue.

Export Issues Neighboring countries such as Zambia require tea to be sold on credit, which can cause cash flow issues for commercial enterprises. This is a major sticking point in negotiations between parties and is the reason why Chombe Tea exports to Zambia are currently on hold.

Access to Finance Many of the estates that provide credit to smallholder tea growers achieve high repayment rates (greater than 95 percent), since repayment is deducted monthly from green leaf purchases. However, because estates are not financial institutions, there is an unmet credit demand for the majority of existing smallholder tea growers.233

5. Telecommunications Industry Analysis Industry Overview Since 1996, the telecommunications sector in Malawi has experienced dynamic activity with new major players in the mobile, internet and fixed line markets. The monopoly of the government-owned cellular operator Telecom Networks Malawi (TNM) ended in 2001, when Celtel Malawi entered the market. Celtel Malawi is part of the Celtel Group, a pan-African mobile service provider operating in 15 African countries.234 Since April 2005, Celtel Group has been a wholly fully owned subsidiary of MTC Group, a Kuwait-based mobile service provider operating in five countries in the Middle East. TNM’s market share is said to be approximately 40 percent, while Celtel controls 60 percent.235 Between these two companies, the number of active connections is less than one million, which is seven percent of the population in

232 Ibid. 233 USAID. (June 2006). Credit Demand and Supply Study of Malawi’s Tea Sector. 234 Celtel. www.celtel.com. 235 Daniel Makata, TNM (March 27, 2008). Personal interview.

FDI in Blantyre Page 57 Malawi. The mobile sales are heavily concentrated in the “top-up business” (prepaid cards), with a volume of negligible post-paid contracts. The reason for this structure is the consumer’s income level: prepaid cards allow more usage control and post-paid contracts are more expensive. In addition, the Government of Malawi is currently finishing the process of awarding a license to a third mobile operator. In 2007, five companies applied for a license, including the South African-based company Econet Wireless and the US-based company Millennium Global Telecom.236

Regarding fixed lines, Malawi has one service provider: Malawi Telecommunications Ltd. (MTL). In February 2006, the government-owned MTL was privatized and handed over to THL, a consortium comprised of Press Corporation Limited, NICO Holdings Limited, Old Mutual Society, and Detecon GmbH.237 In 2007, the Malawi Communications Regulatory Authority (MACRA) awarded the second fixed-line license to Access Communications Limited, a consortium of African investors.238 In July 2008, Globally Advanced Integrated Networks (GAIN) was awarded the third mobile phone license. The company intends to roll out its network in May 2009.239 Shortly after that, MACRA opened applications of six bidders for the fourth mobile phone service license.240 In spite of the continuous growth of these two markets, there are growing concerns about their state of maturity.

After ten years of operation, the Internet Service Provider (ISP) sector in Malawi is also already crowded. There are several companies providing web-hosting, web-mail and wireless services such as Malawi Net, Globe Internet, Skyband Corporation and MTL-Liberty. The bulk of the business is concentrated in the more expensive wireless-based corporate services, of which 50-60 percent is in Malawi Net and Skyband. Individual consumers are still mainly using dial-up connections. However, more than 75 percent of the approximate 40,000 internet users, both corporate and individual, are located in the urban areas of Blantyre and Lilongwe.241 The ISPs have also begun to offer new types of services such as Wi-Fi hotspots around Blantyre, Lilongwe and other major touristy areas. Due to this growth in corporate wireless and the demand for broadband services, the ISPs have reached a bottleneck due to lack of capital and limited access to bandwidth.

The industry is regulated by MACRA, which was established under the Communications Act of 1998. This legislative and regulatory framework was designed for the liberalization of the telecommunications sector as well as for enhancing the participation of the private sector.

Similar to most African countries, Malawi’s telecommunication indicators regarding access to telephones, internet, mobiles and personal computers have significantly improved in recent years according to the World Bank and the International Telecommunications Union. Between 2000 and 2005, Malawi increased the number of telephone main line access per 1,000 inhabitants from 4 to 8, internet users increased per 1,000 inhabitants from 1 to 4 and personal computer users per 1,000 inhabitants from 1 to 2. The major increase was in the number of mobile subscribers per 1,000 inhabitants, which increased from 4 in 2000 to 33 in 2005, representing a more than 600 percent increase. As a percentage of GDP, the total telecommunications sector revenues climbed from 1.7 percent to 4.5 percent in the same period. 242 However, Malawi’s “telecommunication revolution” is limited in comparison to the rest of Sub-Saharan

236 Chimwala, Marcel (August 15, 2008). "Malawi names preferred bidder for third mobile licence ", Engineering News Online (Johannesburg). 237 The Privatization Commission. http://www.privatisationmalawi.org/. 238.Chimwala, Marcel (June 29, 2007). "Malawi’s second operator moves to expand network", Engineering News Online (Johannesburg). 239 Gondwe, Gregory (July 23, 2008). "Malawi: GAIN awarded mobile cellular operator licence in Malawi", Bizcommunity.com. 240 Gondwe, Gregory (July 30, 2008). "Malawi: MACRA unveils bidders for 4th mobile licence", Bizcommunity.com. 241 Ken Thomas, Skyband Corporation (March 26, 2008.). Personal interview. 242 World Bank (April 2007). World Development Indicators Database. http://devdata.worldbank.org/external/CPProfile.asp?CCODE=MWI&PTYPE=CP.

FDI in Blantyre Page 58 Africa, where there is an average of 17 subscribers with telephone main line access per 1,000 inhabitants, as well as 125 mobile subscribers and 29 internet subscribers per 1,000 inhabitants.243 Opportunity The major opportunity in the telecommunications sector is the overall growth that this sector is experiencing across Africa. Mobile technology allows underserved and rural areas to connect to urban areas with little investment required. The focus of the Government of Malawi on rural infrastructure can provide an opportunity for Blantyre-based companies. The rural plan consists partly of the development of “telecenters” —kiosks with an array of basic telecom services such as phone, mobile and internet— whose operations may be in charge of a public-private partnership.

The private sector has not been a major actor in the development of the telecommunications sector in Malawi. For example, there is a lack of centers to train people in computer and telecommunications skills. In addition, investments in the telecommunications infrastructure and human capital typically associated with this industry (e.g. local technicians, engineers and programmers) are limited. Blantyre’s urban area may constitute a market large enough for a kiosk-related investment with a range of telecommunications services, but the ISPs do not provide incentives for SMEs and the equipment is expensive.

The arrival of a second fixed line operator can provide an opportunity for better dial-up connections. Further, if access to greater bandwidth is obtained, ISPs can expand new wireless-based services. New market strategies for increasing airtime can also extract more profits from an almost-exhausted market.

Mobile companies and ISPs may also lobby for the reduction of duties and import taxes for handsets, routers and other telecom-related machinery. Constraints Market Saturation The major constraint for both the mobile and internet markets is market saturation. The pace of growth is diminishing and the technical bottlenecks and limitations of a poverty-ridden country are dramatically reducing the room for new investments and entrants. The cost of entry to those markets is increasingly high and recently admitted operators are expected to face entrenched and seasoned competitors.

The rural initiative has been designed and promoted by the Government of Malawi as a development project with the help of the World Bank. A for-profit company may find the rural telecenters an unattractive investment. The initial investments in equipment can be high and the unreliability of the demand increases the risk of the business. Furthermore, technological challenges may emerge in the connection of these underserved areas with the main telecom infrastructure of the country.

Difficulty to Increase the Bandwidth The difficulty of increasing the bandwidth is a major limitation for the scope of services the ISPs can provide to Malawi users. The inadequacy of the power supply and the quality of fixed line connections are also technical constraints affecting the overall sector.

6. Tourism Industry Analysis Industry Overview According to the National Strategy for Sustainable Development (NSSD), the tourism industry worldwide is experiencing high growth and is at its peak in Malawi.244 Tourist attraction areas in Malawi are mostly

243 Ibid.

FDI in Blantyre Page 59 centered around Lake Malawi which has two resort areas, Mangochi, located on the south side of the lake and the Salima area, on the Western Shore. In the Blantyre area, major attractions include Mount Mulanje, Majete National Park, Zomba Mountain, Liwonde National Park, and tea estates in Thyolo.

The Malawi Government Development Strategy (MGDS) has identified the tourism industry as a priority sector, with potential for growth, and is assisting in the development of this sector. The tourism industry has the potential to be an employment-generating sector, and help generate economic development. The tourism industry accounts for 7 percent of GNP, and 5 percent of employment.245 Malawi is an attractive tourist destination due to its natural landscapes and vibrant culture; however, it lacks the infrastructure and investment necessary to sustain a critical mass of tourists or visitors.

The Government of Malawi is currently strengthening the infrastructure necessary to sustain the viability of this industry.246 Improvements have been seen in road networks, airports, railways, lake transport, and water and energy supply. 247 According to the Government’s Strategic Tourism Development Plan for 2003 – 2008, efforts are also being made to strengthen the facilities of the Ministry of Tourism Parks and Wildlife, with a view to targeting the ecotourism market.248 Furthermore, the Ministry of Finance, in conjunction with the Malawi Tourism Association, has identified incentives to attract foreign investments in this sector. These incentives include the construction of hotels and other tax-free opportunities such as duty-free imports of vehicles for tourism.249

Another plan aiming to develop tourism in Malawi is the aforementioned NSSD in which tourism is identified as a priority. The objective of the NSSD is to enable Malawi to maximize its potential for tourism development.250 Projects mentioned in the NSSD include Lake Malawi and its islands, national parks and game reserves, mountain plateaus and urban centers.251

Additional strategies to strengthen this sector include the Hotel and Tourism Act that aims to establish resort-like attractions such as casinos in Blantyre and Lilongwe.252 Since 50 percent of tourists in the region are on business, hotels that focus on business travelers have proven to be fairly successful in Blantyre.253 In the city, there are five hotels that can provide services at par with international standards and with a capacity to accommodate about 1,000 guests.254 High-grade hotels such as Malawi Sun Hotel, Protea Hotel and Victoria Hotel, as well as surrounding attractions such as Mulanje Mountains, Shire River, and Zomba villages, among others, have the potential to attract visitors.255 Successful investments within the tourism industry include the South African-owned Protea Hotel, which has generated positive returns; the Victoria Hotel, Malawi Sun Hotel, and the Cresta Hotel in Lilongwe, which is locally owned.

244 Ministry of Mines, Natural Resources and Environment (2004). The National Strategy for Sustainable Development. available at: http://www.sdnp.org.mw/enviro/chilwa/ministry/strategicplan/. 245 Regional Program on Enterprise Development (June 2006). The Malawi Investment Climate Survey, (Washington, D.C.: World Bank). 246 Ministry of Mines, Natural Resources and Environment (2004). The National Strategy for Sustainable Development. available at: http://www.sdnp.org.mw/enviro/chilwa/ministry/strategicplan/. 247 Ibid. 248 Ibid. 249 Isaac Katopola, Ministry of Tourism, (January 7, 2008). Personal interview. 250 Ibid. 251 Ministry of Mines, Natural Resources and Environment (2004). The National Strategy for Sustainable Development. available at: http://www.sdnp.org.mw/enviro/chilwa/ministry/strategicplan/. 252 Malopa, Bright Marc E (January 4, 2007). Rich in Resources: Poor Promotional Methods Ampres Tourism Growth. available at: http://www.nyasatimes.com/index.php?news=83. 253 Salad Nthenda, Malawi Tourism Association (March 18, 2008). Personal interview. 254 Ibid. 255 Isaac Katopola, Ministry of Tourism, (January 7, 2008). Personal interview.

FDI in Blantyre Page 60 The number of visitors to Malawi has grown significantly over the past decade. In 2006, 683,000 people visited Malawi, compared to only 183,800 in 1996.256 According to the 2006 data for Malawi, 49 percent of visitors were business travelers, 26 percent were tourists, and 25 percent were visiting friends and family members. Of the 683,000 visitors in 2006, 87,000 (or 14 percent) visited Blantyre; about 32 percent of these were business travelers.257 Despite efforts being made to develop this industry, the current occupancy rate for international quality hotels and lodges remains low, at about 46 percent.258

Opportunity Investment opportunity in the tourism sector in Blantyre is limited. Construction of business hotels and a conference facility have been contemplated, though demand seems to be quite limited. Constraints Inconvenient Access Blantyre is poorly connected by air. There are no direct flights from Europe or the U.S to Malawi. There are a limited number of flights to Malawi from regional destinations, resulting in high costs and long transit times.

Poor Infrastructure The lack of adequate roads, telecommunications and energy supply makes travel inconvenient for visitors whether on business or vacation.

Lack of Funding The Ministry of Tourism has a very limited budget (about US$300,000 per year).259 As a result, Malawi is unable to market itself as an attractive tourist destination. Further, Malawi does not enjoy the same reputation as an ideal vacation spot compared with regional competitors such as South Africa.

Lack of Tourism Training and Expertise The Malawi Institute of Tourism is situated in the center of Blantyre and trains workers for the hospitality industry. Since the institute’s capacity is very limited, only 300 students can be accommodated per year. As a result, many of the personnel in the hospitality industry remain untrained.260

Lack of Competitive Advantage over Regional Competition There is a scarcity of tourist attraction sites in Blantyre compared with cities in neighboring countries such as South Africa, Tanzania, and Kenya that are widely known for their wildlife and other attractions.

Competition from Lilongwe Since the President’s official residence was moved from Blantyre to Lilongwe after President Mutharika was elected, many businesses have begun to relocate to Lilongwe in recent years. It is expected that business meetings and international conferences will be increasingly held in Lilongwe, limiting the demand for such facilities in Blantyre.

256 Ministry of Tourism (2006). "Malawi Tourism Report 2006". 257 University of Durham (June 2002). Malawi Private Sector Partnerships, Tourism Sector Value Chain. 258 Salad Nthenda, Malawi Tourism Association (March 18, 2008.). Personal interview. 259 Isaac Katopola, Ministry of Tourism, (January 7, 2008). Personal interview. 260 Salad Nthenda, Malawi Tourism Association (March 18, 2008.). Personal interview.

FDI in Blantyre Page 61 Appendix II. Foreign Direct Investment in Malawi

The principal destination for FDI in Malawi is agriculture, most notably tobacco and sugar. According to the World Investment Report 2007, published by the United Nations Conference on Trade and Development (UNCTAD), Malawi had US$30 million of FDI inflow in 2006, compared to US$7 million in 2003. Major sectors of investment in addition to agriculture include telecommunications, manufacturing, tourism, and mining.261 The bulk of FDI inflows come from the UK, the US, and South Africa, among others.

Figure 23: Largest Affiliates of Foreign Transnational Companies in Malawi, 2004 Home Sales Company Industry Employees Economy (US$m) A. Industrial Illovo Sugar Malawi South Africa Agriculture 98 10594 Transglobe Produce Exports Mali Food products, beverages and tobacco 3 1800262 Vaimore Paints United Kingdom Chemicals and chemical products 1 60y Limbe Leaf Tobacco Company Ltd. United States Food products, beverages and tobacco - 5300263 Mandala United Kingdom Chemicals and chemical products - 2000y Bata Shoe Company Canada Leather and leather products - 380y B. Tertiary CFAO Malawi Limited France Wholesale trade 2417 300 Metro Cash & Carry Malawi Germany Distributive trade 47 1800264 CELTEL Malawi Limited Kuwait Telecommunications 10 100 Gestetner Japan Wholesale trade 4 -z Alexander Forbes Malawi Ltd. South Africa Other business activities - 30z Continental Discount House Ltd. Mauritius Other business activities - 22z The Cold Chain Zimbabwe Wholesale trade - 10z Lipton Tea United Kingdom Wholesale trade - 5z Hertz Corporation United States Automotive trade and repair - - Macmillan Malawi Ltd. Germany Education - - Maersk Malawi Ltd Denmark Other services - - Fortland Malawi France Other services - - Pricewaterhousecoopers United States Other services - - Sara Lee Corporation United States Construction - - Xerographics United States Wholesale trade - - Assets C. Finance and Insurance (US$) Employees Commercial Bank South Africa Finance 161 763265 AON Malawi Ltd United States Insurance - Source: UNCTAD WID Country Profile: Malawi, 2006.

FDI incentives available in Malawi include the following:266

261 US & Foreign Commercial Service and Department of State (December 2005). Country Commercial Guide: Malawi. 262 2002 data. 263 Estimate. 264 2003 data. 265 2000 data. 266 Malawi Investment Promotion Agency (2007). Investor’s Guide to Malawi 2007.

FDI in Blantyre Page 62 General Incentives • Allowances of up to 40 percent for used buildings and machinery; • 100 percent investment allowance on qualifying expenditure for new building and machinery; • 50 percent allowance for qualifying training costs; • Allowance for manufacturing companies to deduct all operating expenses incurred up to 25 months prior to the start of operations; • Zero duty on raw materials used in manufacturing; • Tax losses carry forward of up to seven years, enabling companies to take advantage of allowances; • Additional 15 percent allowance for investment in designated areas of the country; • Duty-free importation of buses with a seating capacity of 45 persons (including the driver) and above; • Duty-free direct importation of building materials for factories and warehouses; • Duty-free direct importation of goods used in the tourism industry, which includes building materials, catering and related equipment, and water sport equipment; • Free repatriation of dividends, profits, and royalties.

Incentives for establishing operations in an Export Processing Zone (EPZ) • Zero corporate tax rate; • No withholding tax on dividends; • No duty on capital equipment and raw materials; • No excise tax on the purchases of raw materials and packaging materials made in Malawi; • No value added tax.

Incentives for manufacturing in bond: • Export allowance of 12 percent revenue for non-traditional exports; • Transport tax allowance equal to 25 percent of international transport costs, excluding traditional exports; • No duties on imports of capital equipment used in the manufacture of exports; • No surtaxes; • No excise tax or duty on the purchase of raw materials and packaging materials; • A timely refund of all duties (duty drawback) on imports of raw materials and packaging materials used in the production of exports.

FDI in Blantyre Page 63 Appendix III. Investment Climate/ Opportunities/ Constraints Investment Climate According to the World Bank’s “Doing Business” report for 2008, Malawi is ranked 127th out of 178 economies in ease of doing business, based on quantitative indicators analyzing business regulations (starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and closing a business) and the protection of property rights.267

Figure 24: Malawi’s “Doing Business” Report Ranking, 2008 Doing Business 2008 Rank Ease of Doing Business 127 Starting a Business 108 Dealing with Licenses 117 Employing Workers 90 Registering Property 87 Getting Credit 84 Protecting Investors 64 Paying Taxes 78 Trading Across Borders 161 Enforcing Contracts 135 Closing Businesses 135 Source: World Bank, Doing Business 2008. Opportunities Political Stability Malawi has been relatively politically stable since its independence in 1964. There has been minimal violence during the election and campaign periods. The presidential and legislative elections scheduled for 2009 are expected to be very closely contested by the three main parties: the DPP, the United Democratic Front (UDF) and the Malawi Congress Party (MCP).268

Liberalized Economy The Government encourages both domestic and foreign investors to establish and own business enterprises in most sectors of the economy. Public enterprises compete equally with private entities with respect to access to markets, credit and other business operations.269 To facilitate investment activities in Malawi, MIPA was established in 1994 to oversee and facilitate the investment processes for investors.

Bilateral, regional and multilateral trade and investments agreements Malawi has the following multilateral and regional trade agreements:270

• Common Market for Eastern and Southern Africa (COMESA): COMESA has a potential market of 340 million people and a combined GDP of US$170 billion. The nineteen member states within COMESA took steps to consolidate the Free Trade Area in preparation for the transition of the COMESA Free Trade Area into a Customs Union that came into force in December 2008.

267 World Bank (2007). Doing Business 2008 (Washington: World Bank). 268 Economist Intelligence Unit (2008). Country Profile 2008: Malawi (London: The Economist Intelligence Unit Limited). 269 Ibid. 270 Malawi Investment Promotion Agency (2007). Investor’s Guide to Malawi 2007.

FDI in Blantyre Page 64 • Southern African Development Community (SADC): The SADC region has a potential market of 199 million people and a combined GDP of US$176 billion. Under SADC, Malawi is committed to reducing tariffs on intra-SADC trade progressively. Following the 28th SADC Summit in Johannesburg in August 2008, eleven of the 14 member states of SADC launched a Free Trade Area. • African Growth and Opportunities Act (AGOA): AGOA offers duty and quota-free access to the United States market of 303 million people for 1,835 products, in addition to the standard GSP program.271 • Cotonou Agreement/Everything But Arms (EBA): This initiative extends duty and quota-free access to the European Union market for all imports from Least Developed Countries, except arms. Minor variations apply to bananas, sugar and rice. Full liberalization will take place for these commodities 2009. In addition, bilateral trade agreements exist with South Africa, Zimbabwe, and Mozambique, and a customs agreement is in place with Botswana. Further trade agreements are currently under consideration with Zambia and Tanzania.272

The United Kingdom, the Netherlands, Denmark, South Africa, Norway, Sweden and Switzerland still maintain double taxation treaties with Malawi.273

FDI Incentives Tax incentives in Malawi are enshrined in the main tax legislations that include the Customs and Excise Act, the Income Tax Act and the Export Processing Zones (EPZ) Act that came into force in 1995. All companies engaged exclusively in manufacture for export may apply for EPZ status. As of December 2006, sixteen firms were operating under the EPZ scheme. Almost all of these companies are foreign owned. A manufacturing under bond (MUB) scheme offers slightly less attractive incentives to companies that export some, but not all, of their products.274

Dispute Settlement Malawi is a member of the International Center for Settlement of Investment Disputes (ICSID), and accepts binding international arbitration of investment disputes between foreign investors and the state if specified in a written contract. Constraints Landlocked: Limited Port Access & High Transportation Costs Malawi's landlocked position results in high transport costs that can reach beyond 30 percent of the country's total import bill and constitute a serious impediment to trade.275 The shortest, cheapest trade routes are to the Mozambican ports of Nacala and Beira. Malawi's domestic road network is also inadequate, described by the World Bank in 2007 as 50 percent good, 30 percent fair and 20 percent poor.276

271 AGOA.info. http://www.agoa.info. 272 Malawi Investment Promotion Agency (2007). Investor’s Guide to Malawi 2007. 273 DLA Piper US LLP (November 2007). Millennium Cities Initiative: Report on the Regulatory Framework for Foreign Direct Investment, Malawi. 274 US Department of State (2007). 2007 Investment Climate Statement - Malawi. http://www.state.gov/e/eeb/ifd/2007/80721.htm 275 US & Foreign Commercial Service and Department of State (December 2005). Country Commercial Guide: Malawi. 276 Economist Intelligence Unit (2008). Country Profile 2008: Malawi (London: The Economist Intelligence Unit Limited).

FDI in Blantyre Page 65 Poor Power & Water Infrastructure The reliability of electricity supply in Malawi is poor. In 2004, the average company suffered power disruption of 50 days, compared to 48 days in Tanzania and 15 days in Zambia.277

High Interest Rates Both nominal and real interest rates are among the highest in Africa. According to the IMF, the 2009 projected lending rate is 25.0%, compared to 13.5% in South Africa. The real cost of finance is a major obstacle for firms in Malawi.278

High Input and Production Costs Because Malawi is heavily dependent on imports, the cost of inputs is expensive, as they frequently have to be brought in from other countries.

Low-skilled Workforce According to the 2007-2008 Human Development Report published by the UN Development Program (UNDP), adult literacy was 64.1 percent in 2005.279 Malawi’s overall ranking in the Human Development Report was 164th out of 177 countries .280 Likewise, skilled and semi-skilled labor is scarce in Malawi.

Limited Access to Capital and Technology With less than 70 bank branches and only 24 ATMs in a country of about 12 million people, access to banking services remains low. The use of bank cards and telephone and internet banking, though growing, remains below the level observed in other emerging economies. Also, the microfinance industry in Malawi is relatively underdeveloped, with only 20 registered actors and only six providing financial services as their core activity.281

Limited Domestic Market Size Malawi’s economy is relatively small with a GDP of US$2.172 billion in 2006 with limited domestic demand due to low incomes, resulting in weak purchasing power.282

Meeting International Standards MBS is the national government body charged with the responsibility of setting, reviewing, monitoring, and implementing grades and standards. However, many of the standards are out of date and need to be updated to reflect changes in international standards. Capacity strengthening of the MBS, in line with private sector requirements for specific testing capability, would substantially mitigate current export constraints.283

Corruption Malawi, with a score of 2.7 out of 10 (where 10 is considered “free from corruption”) was ranked 118th out of 180 countries in the 2007 Transparency International Corruption Perceptions Index.284 The new

277 Regional Program on Enterprise Development (June 2006). The Malawi Investment Climate Survey (Washington, D.C.: World Bank).. 278 Economist Intelligence Unit. EIU DataServices. https://eiu.bvdep.com/frame.html. 279 Malawi’s overall Human Development Index ranked 164 out of 177. 280.UNDP (2008). 2007/08 Human Development Reports. http://hdrstats.undp.org/countries/data_sheets/cty_ds_MWI.html 281 Regional Program on Enterprise Development (June 2006). The Malawi Investment Climate Survey (Washington, D.C.: World Bank). 282 Malawi Investment Promotion Agency (2007). Investor’s Guide to Malawi 2007. 283 Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report (East Lansing, MI: Michigan State University and United States Agency for International Development). 284 Transparency International (2007). Corruption Perceptions Index 2007. http://www.transparency.org/policy_research/surveys_indices/cpi.

FDI in Blantyre Page 66 president Bingu wa Mutharika, has made the fight against corruption his priority. Since then, several senior ruling party officials and three former cabinet ministers have been charged on corruption offenses.285

285 The former Minister of Education is serving a five year prison sentence and the other cases are still pending in court.

FDI in Blantyre Page 67 Appendix IV. Bibliography

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Duncan Warren, NASFAM (March 12, 2008). Personal interview.

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Economist Intelligence Unit (2008). Country Profile 2008: Malawi, (London: The Economist Intelligence Unit Limited).

FDI in Blantyre Page 68 Edward Labuwana Kholomana, Nali Ltd. (January 17, 2008). Personal interview.

Edwin Chilundo, Dairibord Malawi (Private) Limited (March 19, 2008). Personal interview.

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Fauquet, Claude and Denis Fargette (1990). "African Cassava Mosaic Virus: Etiology, Epidemiology, and Control," Plant Disease 74/6 (June ).

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Gloria Kasongo, NASFAM (March 11, 2008.). Personal interview.

Gondwe, Gregory (July 23, 2008). "Malawi: GAIN awarded mobile cellular operator licence in Malawi," Bizcommunity.com.

Gondwe, Gregory (July 30, 2008). "Malawi: MACRA unveils bidders for 4th mobile licence," Bizcommunity.com.

Haggblade, Steven and Ballard Zulu (December 1-3 ). "The Recent Cassava Surge in Zambia and Malawi," InWEnt, IFPRI, NEPAD, CTA Successes in African Agriculture Conference.

ICRISAT (2007). New horizons for scientific excellence for semi-arid tropics, Annual report 2007.

Imani Development Consultants (June 2004). Review of the Dairy Industry in Malawi (Nairobi: RATES Center).

International Society for Horticulture Science (June 2005). Macadamia: Domestication and Commercialisation, Chronica Horticulture. http://www.actahort.org/chronica/pdf/ch4502.pdf

Isaac Katopola, Ministry of Tourism, (January 7, 2008). Personal interview.

FDI in Blantyre Page 69 K.K. Desai, Knitwear Industries (January 14, 2008). Personal interview.

Ken Thomas, Skyband Corporation (March 26, 2008.). Personal interview.

KPMG (2004). Banking Survey Africa 2004. http://www.kpmg.co.za/images/naledi/banking%20africa%202004.pdf.

Mahmood Dalvy, Commodity Procesor Limited (March 26, 2008). Personal interview.

Malawi Confederation of Chamber of Commerce and Industry (2008). Agricultural Sector Business Opportunities in Malawi.

Malawi Investment Promotion Agency (2007). Investor’s Guide to Malawi 2007.

Malawi Investment Promotion Agency (MIPA). Priority Sector for Investment: Agriculture/Agro-processing. http://www.malawi-invest.net/inves_opp_agri.html.

Malopa, Bright Marc E (January 4, 2007). Rich in Resources: Poor Promotional Methods Ampres Tourism Growth. available at: http://www.nyasatimes.com/index.php?news=83.

Martin B.W. Banda, USAID (March 11, 2008). Personal interview.

Martin Mpata, Mapeto DW&S (January 17, 2008). Personal Interview.

Mataya, Charles S. and Ernest W. Tsonga (2001). Economic Aspects of Development of Agricultural Alternatives to Tobacco Production and Export Marketing in Malawi Analytical Studies on Trade, Environment, and Development No. 7, (Geneva: United Nations Conference on Trade and Development).

Ministry of Agriculture and Food Security (2007). 2006/07 Annual Agricultural Statistical Bulletin, (Lilongwe: Government of Malawi).

Ministry of Agriculture and Food Security (2008). Crop estimates data (Lilongwe: Government of Malawi).

Ministry of Agriculture and Food Security (December 20, 2007). The Agricultural Development Programme - Malawi’s prioritised and harmonised Agricultural Development Agenda: 2008-2012 (Final Draft), (Lilongwe: Government of Malawi).

Ministry of Economic Planning and Development (2007). Annual Economic Report 2007 (Lilongwe: Government of Malawi).

Ministry of Mines, Natural Resources and Environment (2004). The National Strategy for Sustainable Development. available at: http://www.sdnp.org.mw/enviro/chilwa/ministry/strategicplan/.

Ministry of Tourism (2006). "Malawi Tourism Report 2006."

Mkoka, Charles (November 7, 2007.). Purging Malawi’s Peanuts of Deadly Aflatoxin, Sci Dev Net. http://www.scidev.net/en/features/purging-malawis-peanuts-of-deadly-aflatoxin.html.

Monica Khoromana-Unyolo, Nali Ltd (March 17, 2008). Personal interview.

National Smallholder Farmers Association of Malawi (NASFAM). www.nasfam.org.

Oanda.com. http://www.oanda.com.

Pieter Verster, Great Lakes Cotton Company (January 16, 2008). Personal interview.

FDI in Blantyre Page 70 Press Corporation. Chombe Tea. http://www.presscorp.com/index.php?module=htmlpages&func=display&pid=5.

Rawindra A. Kamal, Export Trading Company (March 17, 2008). Personal interview.

Regional Program on Enterprise Development (June 2006). The Malawi Investment Climate Survey (Washington, D.C.: World Bank).

Rex Nyahoda, Tambala Food Products Ltd. (January 15, 2008;). Personal interview.

Salad Nthenda, Malawi Tourism Association (March 18, 2008.). Personal interview.

Semu-Banda, Pilirani (November 21, 2007). TRADE-MALAWI: Coffee Industry Gets Brewing Again, IPS News. http://www.ipsnews.net/news.asp?idnews=40149.

Silim, S.N., Mergeai, G., and Kimani, P.M. (eds) 2001. (Sepember 12-15, 2000). Status and potential of pigeon pea in Eastern and Southern Africa: proceedings of a regional workshop, (Nairobi: International Crops Research Institute for the Semi-Arid Tropics & Gembloux Agricultural University).

Snapp, S.S., Jones R.B., Minja E.M., Rusike J. and S.N. Silim (October 2003). "Pigeon Pea for Africa: a versatile vegetable and more", Hortscience vol. 38/6.

Stewart Khondowe, Small Enterprise Development Organization of Malawi (March 17, 2007). Personal interview.

Susila, Wayan R. (2003). "Good Prospects For Cassava Development," CGPRT Flash 1/2 (September).

Tambulasi, Richard I.C. and Happy M. Kayuni (2007). "Opening a New Window for Corruption: An Accountability Assessment of Malawi’s Four Years of Democratic Local Governance," Journal of Asian and African Studies vol. 42 (2).

The Bandito’s Chile Co. http://www.banditos.co.za.

The Hindu (February 09, 2009). "Tea exports rise 10 pc in 2008; output up 4 pc," (New Delhi).

The Privatization Commission. http://www.privatisationmalawi.org/.

The Regional Trade Center (RATES) (July 2003). Cotton-Textile-Apparel Value Chain Report Malawi. (Nairobi: RATES).

Toomey, David C., Patricia Aust Sterns, and Charles Jumbe (2001). The Impact of Improved Grades and Standards on the Export Potential of Targeted Commodities in Malawi PFID-F&V Report, (East Lansing, MI: Michigan State University and United States Agency for International Development).

Transparency International (2007). Corruption Perceptions Index 2007. http://www.transparency.org/policy_research/surveys_indices/cpi.

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FDI in Blantyre Page 71 UNCDF. http://www.uncdf.org/english/index.php.

UNDP (2008). 2007/08 Human Development Reports. http://hdrstats.undp.org/countries/data_sheets/cty_ds_MWI.html.

UNDP Malawi. Microfinance: Financial Inclusion in Malawi (FIMA). http://www.undp.org.mw/isc.html.

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USAID (November 2006). Credit Demand and Supply Study of Malawi’s Coffee Sector.

USAID. (June 2006). Credit Demand and Supply Study of Malawi’s Tea Sector.

Vito Sandifolo, International Institute of Tropical Agriculture (March 19, 2008). Personal interview.

World Bank (2007). Doing Business 2008, (Washington: World Bank).

World Bank (April 2007). World Development Indicators Database. http://devdata.worldbank.org/external/CPProfile.asp?CCODE=MWI&PTYPE=CP.

Yvonne M. Chikwiri, Chombe Tea (March 20, 2008.). Personal interview.

FDI in Blantyre Page 72 MCI and VCC WORKING PAPER SERIES ON INVESTMENT IN THE MILLENNIUM CITIES

No 06/2008

SUGAR IN KISUMU, KENYA

November 2008

432 Park Avenue South, 13th Floor, New York, NY 10016, United States Phone: +1-646-884-7422; Fax: +1-212-548-5720; e-mail: [email protected] Websites: www.earth.columbia.edu/mci; www.vcc.columbia.edu MCI and VCC Working Paper Series on Investment in the Millennium Cities No 06/2008

As part of this effort, MCI helps the Cities to create employment, stimulate enterprise development and foster economic growth, especially by stimulating domestic and foreign investment, to eradicate extreme poverty – the ﬁ rst and most fundamental MDG. This effort rests on three pillars: (i) the preparation of various materials to inform foreign investors about the regulatory framework for investment and commercially viable investment opportunities; (ii) the dissemination of the various materials to potential investors, such as through investors’ missions and roundtables, and Millennium Cities Investors’ Guides; and (iii) capacity building in the Cities to attract and work with investors.

Correspondence should be directed to any of the editors.

A separate MCI working papers series on the social sector will be available.

For more information, please refer to the MCI website at: http://www.earth.columbia.edu/mci/ and the Vale Columbia Center website at: http://www.vcc.columbia.edu/.

Copyright © 2008 by the Millennium Cities Initiative (MCI). All rights reserved. Unless otherwise indicated, this working paper may be reproduced, quoted or cited without permission of the author(s) provided there is proper acknowledgement. The responsibility for the contents of this Working Paper remains with the author(s). Accordingly, this publication is for informational purposes only and is meant to be purely educational. While our objective is to provide useful, general information, the Millennium Cities Initiative and the Vale Columbia Center make no representations or assurances as to the accuracy, completeness, or timeliness of the information. The information is provided without warranty of any kind, express or implied. This publication does not constitute an offer, solicitation, or recommendation for the sale or purchase of any security, product, or service. Information, opinions and views contained in this publication should not be treated as investment, tax or legal advice. Before making any decision or taking any action, you should consult a professional advisor who has been informed of all facts relevant to your particular circumstances. Sugar in Kisumu, Kenya

KPMG LLP We would like to thank the following KPMG LLP summer interns for their role in the preparation of this report: Elizabeth Davis, University of Virginia, Darden School of Business; Kevin Vakil, University of Michigan, Ross School of Business; Gianfranco Cuoco, New York University; and Sanket Korgaonkar, University of Pennsylvania. Sugar in Kisumu, Kenya 1

Table of contents

Executive summary 2

Kenya/Kisumu overview 4

Cost of production overview 6

Regulatory timeline 9

Sugar industry value chain 11

Greenfield investment opportunity 13

Financial case for the Greenfield investment 14

Refurbishment of facility 17

Refurbishment alternatives 20

Scenarios affecting an investor’s ability to invest in Kenya 21

Operational risks to investment and mitigation strategies 22

Social benefit of investment 23

Investment summary 24

Conclusion 25

References 26 2 Sugar in Kisumu, Kenya

Executive summary

An investor, seeking to financially benefit from producing sugar as a commodity in Kisumu, Kenya, needs to consider the entire investment environment before making a decision. Since Kenya is a net importer of sugar, domestic demand cannot be satisfied by domestic production, which creates a potential opportunity for an investor looking to bridge the gap. As a result, an opportunity may exist for an investor who wants to play a significant role in the future of the industry. Sugar, produced as a commodity within Kisumu, may have the ability to compete on a global scale if time, investment, and governmental support align.

The Millennium Cities Initiative at the Earth Institute at Columbia University has identified the sugar industry in Kisumu, Kenya as the focus for this study. The attraction, for an investor, to the sugar industry in Kisumu is supported by an anticipated 4 percent growth in consumption through 2013 (Industry participant interview 2008). As domestic producers struggle to remain financially viable at competitive levels because of high production costs, importers are seizing control of the market as the number of legally allowed imports continues to increase. The most noticeable response to this market environment has been the establishment of the privately owned Kibos sugar mill in Kisumu, which began operating in 2008 and took approximately three years to establish from conception to realization (Industry participant interview 2008). The market in Kisumu may be penetrable for an investor who has a sound business plan that will create an enterprise that is going to have a substantial financial and social impact. Sugar in Kisumu, Kenya 3

The primary objective of this study was to assist the Millennium Cities Initiative in identifying the economic outlook for foreign investment opportunities in the sugar industry, specifically during the production stage, while assessing the relevant costs and risks associated with the identified opportunities. According to the information provided by sources used, some of the key findings of this report include: • Domestic demand for sugar in Kenya appears to exceed domestic supply; the demand gap is filled by imported sugar • Kenyan sugar mills do not appear to operate at levels of production or efficiency that are competitive in the global marketplace • Consequently, there may be opportunity for investors to turnaround and restructure the current facilities to improve efficiency in producing sugar • Proposed changes in protectionist government regulations and trade agreements have the potential to make several sugar mills unviable by 2012 • There are two potential options for investment in commodity sugar production: – If an investor is able to obtain both land and the necessary permits for construction and operation, the Greenfield investment option may be economically viable and profitable, based on assumptions from research and interviews – However, the refurbishment investment option does not appear to yield a positive net present value (NPV) • Government regulations and requirements may pose significant challenges for both the Greenfield and refurbishment options 4 Sugar in Kisumu, Kenya

Kenya/Kisumu overview

Bordered by Somalia, Ethiopia, Sudan, Uganda, and Tanzania, Kenya resides on the eastern coast of Africa. The population stands at approximately 38 million people with nearly 40 percent unemployed and 48 percent living below the absolute poverty line (defined as less than $1 per day). Kenya’s infrastructure includes nearly 2,778 kilometers of railroad, 63,265 kilometers of roads of which 14 percent are paved and 225 airports of which 7 percent are paved (Kenya-Advisor 2008), which highlights the need for further development. Recent studies done by the Common Market for Eastern and Southern Africa (COMESA) have placed Kenya second out of the 19 COMESA countries for ease of doing business, defined as the procedure required to register and incorporate a business as well as the level of capital investment required to enter Kenya for an investor ($100,000) (COMESA Doing Business 2008 and Invest in Kenya: Focus Kisumu 2007, p.48). As the 14th largest economy in Africa with a 2007 GDP of nearly $60 billion, Kenya is projected to grow at a 5.7 percent compounded annual growth rate (CAGR) through 2013 reaching nearly $87 billion (International Monetary Fund 2008).

2004–2006 actual GDP and 2007–2013 projected GDP at purchasing power parity Major drivers behind GDP expansion include growth in tourism and telecommunications markets, as well as governmental reforms.

Source: International Monetary Fund, 2008.

Kisumu, located along the coast of Lake Victoria, is found in the western region of Kenya. With a population close to 565,000 people comprised mostly of casual laborers and farmers, Kisumu’s location and accessibility to natural resources is situated well for an investor considering the agricultural industry. Additionally, the Kenyan government has increased investment in infrastructure partly due to Kisumu earning city status. Currently, Kisumu infrastructure includes one airport and one port. The major industries that nourish Kisumu’s economy include groundnuts, aquaculture, dairy, and sugar (Invest in Kenya: Focus Kisumu 2007, pp.17–30). Due to an ideal environment created by Lake Victoria for sugarcane growth, Kisumu has seven sugar mills that satisfy around 60 percent of domestic demand while the remaining 40 percent is supplied by imports largely supplied by South Africa and Egypt (Industry participant interview 2008). The 40 percent figure, however, does not reflect the number of illegal imports that Kenya experiences on an annual basis, which also contribute to satisfying the gap between supply and demand. Sugar in Kisumu, Kenya 5

Total Kenyan sugar imports in 2005 were 167,000 metric tons, with the majority coming from other African countries Due to proximity and trade agreements, sugar companies in South Africa and Egypt dominate the import market for sugar in Kenya.

Source: Kenya Sugar Board statistics, 2008.

Although consumption is projected to grow at nearly 4 percent CAGR in the next 4.5 years, domestic production is only set to grow at 1.6 percent CAGR (Kenya Sugar Board Statistics 2008). This statistic may imply that inefficiencies exist within the local production environment, and the opportunities that may exist for an investor to capitalize on Kenya’s status as a net importer of the commodity.

Recent declines in domestic production are attributable to lack of sugarcane crop being available to convert into sugar. Also, aged mills being susceptible to machinery breakdowns increase downtime due to repair. Other major factors contributing to low crop yields and low levels of production include limiting infrastructure conditions, drought, farm fires, and civil unrest (Industry participant interview 2008). Investment in road improvement and irrigation could improve crop yield and labor output, and reduce costs.

Kenyan sugar consumption, 2003–2012F

CAGR (%) 2003–2007 2008–2012F Imports 4.8% 8.1% Domestic production 1.8% 1.6% Total consumption 2.7% 3.9%

Sources: (1) Kenya Sugar Board statistics, 2008; (2) Industry participant interviews, 2008. 6 Sugar in Kisumu, Kenya

Cost of production overview

The average cost per metric ton to produce sugar across the seven sugar mills in Kenya is higher than that of the rest of the world ($415 for Kenya vs. $263 for world) (The LMC Worldwide Survey of Sugar and HFCS Production Costs 2005, pp.10–11). Of the $415 cost per metric ton, 60 percent is attributed to field costs, which are defined by labor, capital, and fuel costs, 25 percent is attributed to factory costs that include labor, capital, and fuel costs, and the remaining 15 percent is administrative costs (The LMC Worldwide Survey of Sugar and HFCS Production Costs 2005, pp.10–11). Kisumu mills, already suffering from the existing weak infrastructure, use outdated methods to extract sugar from the cane. Conventional extraction technology inhibits the mills from engaging in cost-efficient production, which depletes the capital required for research and development and infrastructure improvement. Lack of investment in new technology and machinery puts factory time efficiency for Kenya at 57 percent compared to the world average of 91 percent (Industry participant interview 2008).

Based on information available for five out of the seven Kenyan sugar mills, every mill produces at a cost above the world average of $263 per metric ton. Sugar production cost per metric ton – Kenyan sugar mills versus world average

Source: The LMC Worldwide Survey of Sugar and HFCS Production Costs, 2005. Sugar in Kisumu, Kenya 7

Additionally, sugar production costs in Kenya appear to be increasing at a faster rate than the world average. When tied to the average inflation rate that Kenya and the world have historically experienced from 2003 to 2005, production costs are forecasted to increase at 6.1 percent CAGR versus the world’s 2.6 percent CAGR. Sugar production cost per metric ton in Kenya versus world average, 2003–2013F

CAGR (%) 2003–2005 2006–2013F Kenya average production costs 3.9% 6.1% World average production costs 3.4% 2.6%

Sources: (1) The LMC Worldwide Survey of Sugar and HFCS Production Costs, 2005 (2) The Economist, 2008.

Due to the production inefficiencies that exist within Kisumu’s sugar mills, the price per metric ton of sugar charged to consumers is higher than the other COMESA countries. Importers, such as South Africa or Egypt, take advantage of the high retail prices in Kenya by undercutting domestic ex-factory prices by approximately 6.5 percent (Industry participant interview 2008). Importers make high margins off their product because their production costs are lower, making Kenya an attractive market. Consequently, import syndicates have formed that capture margins more than double that of domestic producers. The average ex-factory price in Kenya is $847 per metric ton, and the sugar is sold at an average retail price of $1,068 per metric ton – a margin of nearly 21 percent. The ex-factory price of imports is $476 per ton and is sold at a retail price of $856 per metric ton, a margin of 44 percent (Kenya Sugar Board Statistics 2008; Action Aid International 2007). Because demand continues to outpace supply, Kenya’s consumers have demonstrated a willingness to pay that remains appealing to low-cost producers.

Margin comparison of domestic and imported sugar

Domestic sugar Dollars/metric ton Ex-factory price 847 Retail price 1,068 Gross margin (Ex-factory to retail) 20.7% Imported sugar Dollars/metric ton Ex-Mombasa price 476 Average retail price 856 Gross margin (Ex-Mombasa to retail) 44.4%

Sources: (1) Kenya Sugar Board statistics, 2008; (2) Action Aid International, 2007. 8 Sugar in Kisumu, Kenya

The sugar industry in Kenya is protected by COMESA safeguards which, limit the number of imports that are allowed into the country. In 2012, these restrictions are set to expire and the market will be liberalized. As a result, sugar prices are expected to fall 54 percent to COMESA levels, which would potentially affect the domestic production landscape (Industry participant interview 2008). Although there are seven sugar mills in production in Kenya, industry sources indicate that only Mumias and Kibos would survive should the safeguards be lifted because they can produce sugar at costs similar to those of the other COMESA countries based on facilities equipped with modern technology that can achieve high utilization (Industry participant interview 2008). Kibos has recently installed state-of-the-art technology in order to produce at lower costs, while Mumias continuously invests in production upgrades to keep costs low. Another technique used by both mills to keep costs lower than their competitors is cogeneration. Cogeneration is a system that takes sugar byproducts, converts all of it into energy, and supplies the mill’s electricity need.

The Kenyan domestic and imported retail prices of sugar in Kenya grew at 11 percent and 9 percent CAGR from 2003–2007. However, both are projected to decrease to the COMESA average price in 2012 when safeguards expire.

Kenyan retail price of sugar versus world and COMESA average prices, 2003–2013F

CAGR (%) 2003–2007 2008–2013F Kenya retail price 11% (8%) Imported retail price 9% (5%) COMESA average price N/A 5% World free market average price 10% 4%

Sources: (1) Kenya Sugar Board statistics, 2008; (2) Action Aid International, 2007; (3) Organization for Economic Co-Operation and Development and Food and Agriculture Organization of the United Nations, 2008; (4) Project Africa interview program, 2008.

Note: Actual COMESA average prices not available Sugar in Kisumu, Kenya 9

Regulatory timeline

The Kenyan sugar industry is closely tied to the government and is highly influenced by domestic as well as international policy. Expiring regulations on tariffs and quotas have been previously extended for an interim period, as Kenyan sugar was still not competitive with the world. However, current and pending regulations are set to expire in the near future.

Sources: (1) SUCAM, 2003 (2) Nyangito, 2003 (3) COMESA Aide Memoir, 2008 (4) Business Daily, 2008 (5) EAC Partnership.

Considering the regulatory environment in Kenya is necessary before an investment opportunity is pursued. Current sugar prices in Kenya are inflated due to government protectionist policies. If COMESA regulations are lifted, there may be an influx of sugar from other countries, driving the sales price of sugar in Kenya down by approximately 25 percent to COMESA average prices (Industry participant interview 2008). Prior to COMESA regulations expiring, domestic sugar production is expected to make up 60 percent of Kenyan sugar consumption. Assuming COMESA safeguards are allowed to expire in 2012 and no efficiency improvements to Kenyan sugar mills are made, only Mumias and Kibos will remain in operation. 10 Sugar in Kisumu, Kenya

In 2013, after the safeguards are lifted, Kenya has a number of regulating bodies and agreements that are currently organized domestic sugar production is projected to both promote and protect investment. Furthermore, Kenya currently has bilateral to only account for 45 percent of total trade agreements with over 27 countries and is in negotiations with over 14 more. Kenyan consumption. Since Kenya is a COMESA nation, it enjoys a free trade agreement with 18 other Forecast domestic sugar production countries within Africa and there is a zero duty issued on imports. Based on industry versus imports (assuming COMESA safeguards are lifted), 2012F–2015F participant interviews, the success that each organization or agreement has had on investment-related initiatives is not necessarily measurable at this time.

The following is a list of those regulating bodies and specific acts that were enacted to promote and protect investment in Kenya: • KEPSA – the Kenyan Private Sector Alliance is an umbrella organization formed in 2003 comprised of 200 private-sector organizations designed to ensure the formation of policies protecting and encouraging foreign direct investment • IPA – the Investment Promotion Act of 2004 eliminates and/or simplifies many of the complicated licensing issues needed to invest in Kenya • NESC – the National Economic and Social Council is a forum where government officials and labor union representatives get together to identify policy issues hindering investment in Kenya and suggest alternate approaches • MIGA – the Multilateral Investment Guarantee Agency is an affiliate of the

Sources: (1) The LMC Worldwide Survey of Sugar and HFCS Production World Bank Group that insures investors against the loss of investment due to Costs, 2005 (2) United Nations, 2007 (3) Mumias company information (4) Agilo Esperance, et.al., 2007. political instability • FIPA – the Foreign Investment Promotion Act protects against expropriation of private property by the government • AGOA – the African Growth and Opportunity Act, which has been extended until 2015, stipulates that Kenya has duty-free access to export goods to the United States • CTA – the Cotonou Trade Agreement states that all exports from Kenya to the European Union (recently expired and extended until 2010) are free from all quota regulations and entitled to preferential duty restrictions

The Kenyan sugar industry appears to be heavily dependent on the rules and regulations set forth by its government. The government, historically, has made interim agreements every time a protectionist policy is set to expire. This behavior, although temporarily beneficial in protecting the domestic sugar industry, seems to be a common response, which may further delay improvement of the existing conditions inside the mills. Since the majority of mills are owned by the government and based on the debt each mill has outstanding, the incentive for the government to approve a Greenfield project could be lowered. Additionally, if a foreign investor wants to pursue the refurbishment option, he/she needs to understand the current covenants involved with the outstanding debt and whether they can be renegotiated or erased entirely. Sugar in Kisumu, Kenya 11

Sugar industry value chain

There are four major steps in the sugar industry value chain: harvesting, production, distribution, and consumption. At each step, a significant number of actions are taken and a number of stakeholders are involved.

Harvesting Production Distribution Consumption • There are two main sources • Sugarcane crushed and • Sugar reaches the end • Sugar produced domestically of sugarcane converted into raw sugar consumer through a competes with low-cost – ‘Smallholders’ and – Byproducts include network of wholesalers imported sugar outgrower farms molasses, bagasse, and distributors • Refined sugar for industrial provide about 80 percent and filter mud • 16 percent value-added use is imported and not of cane supply • Part of sugar production tax and a 7 percent sugar manufactured in Kenya – Nucleus estates provide exported to EU under development levy are 20 percent of cane supply EAC-EU agreement applied to sugar • Kenya’s harvest period is up • Kenya average Factory • Inefficient administration to 10 months longer than Time Efficiency is 57 percent of quotas enables a cartel neighboring countries due to frequent factory of importers to charge • Poor harvest methods lead breakdowns; The world higher prices for lower- to deterioration of crop average stands at 91 percent cost imported sugar within 24–48 hours • Import licenses have been • Weak infrastructure results revoked to curtail the level in high transportation costs of illegal imports • Currently, byproducts are used for alcohol distillation Sources: (1) CGD Bills Digest, 2004; (2) Aguilo, et al, 2005; EPZA, 2005. and electricity generation

1 Factory Time Efficiency is an index measuring the ability of a factory to sustain operations assuming no cane-supply problems. Distribution of retail price of domestic sugar is based on average local sugar retail price of 76.04 KSh/kg. 12 Sugar in Kisumu, Kenya

The inefficiencies along the Kenyan sugar value chain open up a wide variety of potential investment opportunities at the harvesting, production and distribution stages.

Harvesting investment opportunities Production investment opportunities Distribution investment opportunities • Introduce new varieties of sugarcane • Greenfield investment in new • Production of ethanol from molasses to achieve higher yields and better Kisumu sugar mill – Kenyan sugar companies currently sugar content – Kenya is a net importer of sugar export molasses, which could instead – Kenya’s sugarcane variety is inferior indicating an unmet demand be used to produce ethanol to that of neighbors for sugar – Kenya currently has feedstock to • Introduce new harvest methods – Establishing a new mill with produce 50 million liters of fuel • Develop the use of and finance furrow latest machinery and technology ethanol a year irrigation for smallholders may be profitable – There is no current E10 mandate – Easier to maintain, cheaper, and less – Impending liberalization of the requiring use of ethanol in combination water wasted market in 2012 would open export with gasoline – Likely to raise crop yields to more markets and drive inefficient • Bagasse waste product for cogeneration competitive levels producers out of business – Convert waste from sugarcane stalk – Decreases sugarcane growth time • Refurbishment of existing Kisumu mill to generate heat and electricity for and variability – Privatization by government opens mill through cogeneration possibility of acquiring existing mill – Mills can become selfsufficient for with land and raw material contracts electricity needs, thereby reducing in place utility costs – Upgrading current mill through – Additional revenue stream from sale technological and infrastructure of electricity to the national grid advancement may be efficient • Filter mud can be recycled and sold to Sources: (1) CGD Bills Digest, 2004; (2) Aguilo, et al, 2005; EPZA, 2005; (3) Industry participant interviews, 2008. and profitable farmers as fertilizer

This study focuses specifically on the investment opportunities in the production stage of the sugar value chain. There are a number of reasons for focusing on this area, but most important is the captive market for sugar, based on the historical need for imports. In addition, there is a large community of sugarcane farmers linked to the sugar industry, and if nothing is done to help modernize and revitalize the sugar industry in Kenya, these farmers will potentially see demand for their crop reduce significantly as well as their livelihoods destroyed. Although a number of countries have decided to focus their sugar industries on the production of byproducts, this study’s aim was to focus on the problems at the core of the industry before focusing on the development of ancillary industries, such as byproduct development. Sugar in Kisumu, Kenya 13

Greenfield investment opportunity

An investment in a Greenfield sugar mill would allow an investor to start from scratch and construct a sugar mill as well as negotiate agreements with out-growers to produce sugar more efficiently and cost effectively. The entire facility, including the irrigation plans for the nucleus estates, the water treatment plants, and the transportation network, could be developed to achieve the highest efficiency possible and achieve maximum utilization of the facility. Achieving a higher utilization rate supplemented by state-of-the-art technology, a Greenfield mill could potentially capture a significant portion of the existing domestic market as well as compete more effectively with other COMESA nations’ sugar products. As an example, a sugar mill designed to produce 200,000 metric tons of sugar per year would increase overall domestic production in Kenya from 507,000 metric tons per year to 707,000 metric tons per year, an increase of 39 percent, and the new mill could potentially capture up to 20 percent of the market.

Total potential and annual production Market share of potential after Greenfield investment Greenfield investment

Source: Kenya Sugar Board statistics, 2008.

However, there are challenges that an investor would face while developing a Greenfield sugar mill. First, the presence of small holdings of land spread among the local farmer population lengthens the process of acquiring land as ownership is often contested. Secondly, since the regulatory environment is unstable, there is uncertainty surrounding future amendments and changes to regulation regarding foreign investment in the country. These factors, along with additional risks of investment, which will be discussed later, have the potential to be influential in determining the profitability of the Greenfield investment. 14 Sugar in Kisumu, Kenya

Financial case for the Greenfield investment

A financial analysis was performed to asses the potential profitability of a Greenfield investment in a number of different scenarios. There were a number of key assumptions made in order to conduct this analysis and the rationale behind those assumptions is below.

Assumptions for Greenfield sugar manufacturing facility

Category Assumptions Comments Revenue assumptions Production capacity (metric tons per year) 200,000 N/A Utilization 80% Mumias, currently the most profitable mill, operates on average at a utilization of 80% Sales price (KSh/metric ton) 42,000 Interviews lead us to expect price of imported sugar to reach this level by 2012(2) Sales price growth 3% This is a conservative estimate; average imported sugar price grew on average 6% in the last 10 years Molasses produced per metric ton of sugar 0.32 Based on industry research(2) (metric tons) Price per metric ton of molasses (KSh/metric ton) 1,800 Price of molasses in Kenya in 2007(2) Cost assumptions Raw sugarcane (KSh/metric ton) 2,500 Price at which Kibos sugar mill acquires sugarcane(2) Sugarcane price growth (KSh/metric ton) (1%) Likely to fall as supply of sugarcane is constantly increasing(2) Cane to sugar conversion ratio 11% Based on industry research(2) Variable production cost (KSh/metric ton) 110 Includes other chemicals and raw materials required to process sugar(2) Permanent employees 300 Includes executive, administrative, and security personnel(2) Average permanent employee wage per month (KSh) 25,000 Based on Kibos sugar mill expenditure on permanent employees(2) Casual employment per annual metric ton of sugar 0.09 Based on Kibos sugar mill use of casual labor and production capacity(2) produced Wage per casual employee per month (KSh) 3,846 Based on Kibos sugar mill use of and expenditure on casual labor(2) Investment assumptions Fixed Greenfield investment per metric ton of built 297,000 Greenfield investment refers to equipment needed to manufacture sugar(2) capacity (KSh ‘000s) Variable Greenfield investment per metric ton of 12,182 33% of investment assumed to be fixed, and 66% scalable built capacity (KSh) Fixed infrastructure investment per metric ton of 297,000 Infrastructure investment refers to construction of plant and development of roads(2) built capacity (KSh ‘000s) Variable infrastructure investment per metric ton of 12,182 33% of investment assumed to be fixed, and 66% scalable built capacity (KSh) Fixed agricultural estate investment (KSh ‘000s) 297,000 Agricultural estate investment includes developing irrigation and harvesting systems of affiliated farmers(2) Variable agricultural estate investment per metric 12,182 33% of investment assumed to be fixed, and 66% scalable ton of built capacity (KSh) Logistics and feasibility study (KSh ‘000s) 300,000 Assumed to be constant in relation to capacity(2) Licenses (KSh) 10,000 Assumed to be constant in relation to capacity; one time expense(2) Financial assumptions Discount rate 18% Based on industry research(2) Growth rate 7% Average growth rate in first 5 years of operation Exchange rate (Shillings per Dollar) as of 7/16/08 66.68 According to Yahoo! Finance, July 16, 2008 Inflation 7% Adjusted downwards from 2007 numbers of 9% to reflect potential mitigation of political disturbances in future

Sources: (1) Export Processing Zones Authority, 2005; (2) Industry participant interviews, 2008; (3) Aguilo, et al, 2007. Sugar in Kisumu, Kenya 15

There were two additional assumptions in the model. First, a construction time of three years was assumed based on industry participant interviews, and second, a ramp up in utilization from 60 percent in year 4 to the maximum utilization of 80 percent in year 5 was applied. Based on these assumptions, and not taking depreciation into account, a cash flow analysis yielded a potential net present value of approximately $29 million with a payback period of nine years.2

Financial overview of Greenfield investment in Kisumu sugar mill

($’000s) 1 2 3456789 Net income(1)(2) –––15,374 23,182 24,978 26,789 28,614 30,453 Total investment (41,492) (41,492) (41,492) –––––– Net cash flow (41,492) (41,492) (41,492) 15,374 23,182 24,978 26,789 28,614 30,453

Estimated financial benefit

NPV ($’000s) 28,636 IRR 4% Payback period (years) 9

Sources: (1) Export Processing Zones Authority, 2005; (2) Industry participant interviews, 2008.

In addition to analyzing the base case model, sensitivity analyses were performed to determine the effect of fluctuations in sugar prices and factory utilization rates. With regard to potential sugar prices, the worst case scenario involves a sales price per metric ton of sugar to drop to the world average price of 24,344 KSh/metric ton, and a best case scenario in which the sales price rises to the current sales price per metric ton of sugar from the Mumias facility of 47,800 KSh/metric ton. These scenarios yielded net present values of negative $132 million with a payback period of more than ten years and positive $79 million with a payback period of approximately seven years, respectively.

Sensitivity analysis: Sale price for sugar

Category Worst case Most likely Best case Assumption Price (KSh/metric ton) 23,344 42,000 47,800 World COMESA Mumias forecast forecast current Economic return NPV ($’000s) (132,131) 28,636 78,495 Payback period (years) >10 9 7

Source: Industry participant interviews, 2008.

2 Does not take depreciation into account. 16 Sugar in Kisumu, Kenya

The second sensitivity analysis conducted was on capacity utilization rates at the facility. The worst case scenario assumed that the facility operated at approximately 60 percent, the current average of Kenyan sugar mills, and the best case scenario assumed that the facility operated at the world average utilization of 90 percent. This analysis yielded net present values of negative $7 million with a payback period of ten years and a positive $46 million with a payback period of approximately seven years. In this analysis, a breakeven point, with a zero net present value, was achieved at 64 percent utilization.

Sensitivity analysis: Capacity utilization

Category Worst case Most likely Best case Assumption Utilization 60% 80% 90% Current Mumias Industry average utilization standard Economic return NPV ($’000s) (7,311) 28,636 46,609 Payback period (years) 10 9 8

Source: Industry participant interviews, 2008.

The Greenfield investment opportunity appears to present investors with a potentially viable and profitable investment. Sugar in Kisumu, Kenya 17

Refurbishment of facility

The second investment explored within the production stage of the value chain was the refurbishment of an existing facility to the Mumias standard of operation. At present, only one of the operating sugar mills, Mumias, produces at or above the global sugar mill production average of 135,000 metric tons of sugar per year (Kenya Sugar Board Statistics 2008). In addition, the world average production utilization rate is over 93 percent, a rate that no mill in Kenya currently achieves.

The rationale for the refurbishment of a facility as opposed to construction of a new facility rests on the ease of execution. The construction time-frame is two years, based on industry participant interviews, and the time and expense related to acquiring permits and licenses can be avoided because mills are already in possession of working papers and the mills are also owned by the government. In addition, existing mills already have a network of out-growers transporting sugarcane to the mills, and no new contracts would be necessary.

As an example, the refurbishment of the Muhoroni mill, one of the most cost-intensive sugar production facilities in Kenya, currently operating at 51 percent utility and producing 38,000 metric tons of sugar per year, to Mumias’ capacity utilization, would increase production at the facility by 58 percent to 80,000 metric tons per year, and net the facility a 4 percent gain in market share, to 11 percent.

Current production of existing sugar Projected production of sugar mills mills before refurbishment after refurbishment of Muhoroni

Market share of mills before refurbishment Market share of mills after refurbishment

Source: Kenya Sugar Board Statistics, 2008. 18 Sugar in Kisumu, Kenya

There are also a number of potential impediments to an investor’s ability to profitably refurbish an existing facility. Current government valuations of existing sugar mills appear to be inflated, as evidenced by the 2007 halt of the sale of two sugar mills based on claims of inaccurate valuations. The sugar mills also have large amounts of outstanding debt that the government is currently not willing to retire, which amounts to approximately 4.7 billion KSh (Industry participant interview 2008). Besides the financial roadblocks, it has historically been difficult for foreign companies investing in the sugar industry to obtain the correct licenses and begin operation in Kenya (Industry participant interview 2008). As mentioned in the Greenfield investment opportunity, land ownership is also a major concern. In addition to claims of improper valuations on the Miwani and Muhoroni facilities, claims were made that the government did not have the right to sell the facilities because they were located on land that was privately owned.

Refurbishment of the Muhoroni facility to exclusively produce commodity sugar does not appear to be profitable. An investor would initially have to purchase a 51 percent majority ownership stake in the mill, which, based on the 2007 bid by Pan-African Millers Limited, amounts to approximately $23 million. Once purchased, an investor would have to invest an additional $32 million approximately, based on the current size of the Muhoroni facility and the assumptions stated in the previous section including infrastructure improvements, agriculture development, as well as other miscellaneous costs. An analysis of this investment yielded a potential terminal value of approximately $43 million and a net present value of approximately negative $29 million with a payback period of nearly 17 years.

Financial overview of potential investment (‘000s)

Purchase of 51% ownership(1) (22,945) Refurbishment investment(2) (109,614) Terminal value 54,093 Net present value (70,885) Payback period 17 years

Sources: (1) Odhiambon, 2008; (2) Industry participant interviews, 2008. Sugar in Kisumu, Kenya 19

However, there are scenarios in which refurbishment could potentially be profitable and have a positive net present value. If the government were to allow an investor to take over a facility free of charge and it did not require service on the current debt on the facility, the refurbishment investment option appears to be more viable. Based on the assumptions that were stated in the base case model for a Greenfield investment, a sales price of 42,000 KSh per metric ton of sugar, capacity utilization of 80 percent, and an approximately $32 million refurbishment investment, there appears to be a net present value of approximately zero, and a payback period that is greater than nine years, resulting in an option that is more appealing for an investor.3

Financial overview of potential investment in refurbishment of Muhoroni sugar mill

($’000s) 1 23456789 Net income(1)(2) – – 3,201 4,268 4,713 5,076 5,443 5,815 6,212 Total investment (16,442) (16,442) ––––––– Net cash flow (16,442) (16,442) 3,201 4,268 4,713 5,076 5,443 5,815 6,212

Estimated financial benefit

NPV ($’000s) (8) IRR 1% Payback period (years) >9

Sources: (1) Export Processing Zones Authority, 2005; (2) Industry participant interviews, 2008.

3 Does not take depreciation into account. 20 Sugar in Kisumu, Kenya

Refurbishment alternatives

Although the refurbishment of a sugar mill for the exclusive production of commodity sugar does not appear to be profitable, the refurbishment of a sugar mill to produce sugar and other cane derivatives may have more potential. In 2002, Spectre International was granted land titles to 112 hectares abandoned by the Kenya Chemical and Food Corporation, including the Kisumu Molasses Plant. In January 2003, Spectre sold a 55 percent majority interest to Energem Resources for approximately $2 million. Subsequently, Energem invested approximately $14 million to refurbish and convert the facility to produce biofuels, alcoholic beverages, and yeast. Currently, the facility’s production capacity is approximately 29 million liters per year. In 2004, a third party valued the facility at $100 million, as compared to a precommissioning value of $24 million. Given Energem’s 55 percent interest in the company and their approximately $16 million investment in the facility, it appears that Energem’s return on investment since inception is approximately 261 percent.4

Energem Resources financial results

Precommissioning valuation(1) $24,000,000 Energem investment(2) Purchase price(2) $2,000,000 Refurbishment(2) $14,000,000 2004 valuation of facility(2) $100,000,000 Return on investment Approximately 261%

Sources: (1) Energem Resources, Inc; (2) Millennium Cities Initiative, 2007.

It is unclear whether it would be possible or permitted by the Kenyan government for a foreign investor to enter the country with this type of investment idea; however, given the current situation of the Kenyan sugar industry, a need for alternative revenue streams appears to be necessary in order for the current sugar mills to be profitable going forward.

4 Analysis assumes that a 51 percent stake in ownership nets the investor 51 percent of total net income. Sugar in Kisumu, Kenya 21

Scenarios affecting an investor’s ability to invest in Kenya

There are a number of potential tabulation would have a ripple-effect in investment initiatives such as the scenarios that would deter an investor the level of foreign investment. As an Investment Promotion Act and the from investing in the Kenyan sugar example of how the recent civil unrest Foreign Investment Protection Act will industry, including the government’s and political instability has affected remain ineffective and acquiring licenses current high valuations of the existing development in the sugar industry, the and permits for foreign investors can be mills, its refusal to retire the debt on Kibos facility was required by investors delayed, postponing operational launch these mills, and the reportedly difficult to obtain a $10 million political insurance and delaying returns. Secondly, if the procedures and policies for foreign policy from the Multilateral Investment government and the port authorities investors to acquire or lease land to Guarantee Agency in order to receive do not initiate a system of checks and begin operations. In addition, if the the financial backing the investor balances to monitor import quotas, illegal recent civil unrest and political instability group required to complete the facility imports into Kenya will continue to rise, caused by the December 2007 elections (Industry participant interview 2008). which will harm the potential revenue or continues, investors will be deterred and ease of sugar sale for foreign investors. their ability to invest in Kenya hindered. If an investor is able to invest in the Also, there is the potential continuation For example, a scenario in which the Kenyan sugar market, there are a of the COMESA trade agreement, which collapse of the Party of National Unity number of scenarios that would affect will protect existing mill operations and Orange Democratic Movement the ease of execution. If the government and the welfare of the sugarcane power-sharing agreement occurs and/ continues to protect its domestic out-growers, thus effectively eliminating or the inability of the government to producers and land owners, most of any government motivation to modernize legitimize election procedures and vote whom have ties to the government, or privatize the existing facilities. 22 Sugar in Kisumu, Kenya

Operational risks to investment and mitigation strategies

In addition to the political and regulatory Victoria and to reduce dependence on through subsidizing farm development risks associated with investments in the natural rainfall. The demand risks for and modernization, thereby taking an Kenya sugar market, there are a number sugar are also numerous and a cause invested interest in the prosperity of of operational risks an investor will face. for investor concern. Decreased demand the mill’s suppliers. However, despite the risks, there are a could result from increased numbers number of possible mitigation strategies of illegal imports into Kenya. In order The state of infrastructure in Kenya is to reduce the likelihood of an investor to brand their products, investors could another concern for investors when being affected. use a marketing campaign to increase considering the operations of a sugar awareness among the Kenyan population mill. Although there have been funds set The potential supply and demand to differentiate domestic sugar from aside by the government for the repair of risks an investor faces are of the most imported sugar as a premium product. existing roads as well as for the paving concern. There are a number of factors of additional roads, there is the potential that affect the supply of sugarcane There is also significant risk associated for continued delays due to poor project available. Under normal circumstances, with the sales price of sugar in the management or the unavailability of there is an abundance of sugarcane future. As the number of imports raw materials needed for construction. produced in Kenya; however, given the increase in Kenya, the price of sugar Investors might consider either privately nature of the type of sugarcane used in could be depressed to unprofitable funding the road development or working Kenya, the amount of sugarcane available levels, impacting the projected returns with the government to negotiate a fluctuates greatly. Recently, the supply and payback period of the Greenfield contract for infrastructure improvement. of sugarcane to the mills has been or refurbished mill. To attempt to limited due to extensive burning of the mitigate risk and maintain profitability Additionally, the implementation of outgrowers’ fields by rioters and other in this situation, investors could differ- modern management methods and protestors. In addition, changes in the entiate their product through a number process are critical to the efficiency and weather and abnormal weather patterns of ways including the marketing financial performance of a Kenyan sugar have the potential to adversely affect the campaign described above, selling mill. An investor will need to attract supply of sugarcane available. In order different varieties of sugar such as management with experience in running to attempt to mitigate the effects regular, premium, deluxe, etc., or successful mills and may need to invest of decreased supply of sugarcane, through promotions and other bulk in employee training programs. investors could increase expenditures discounts. In addition to the sales price on research and development to adopt of sugar being depressed, there exists Lastly, an investor can face currency risk a more suitable type of sugarcane or the possibility of outgrowers forming due to the volatility of the Kenya shilling. cane alternative for the Kenyan climate. a union and subsequently charging This can lead to the need for additional Investors could also work with the premiums on their sugarcane. In order funding, but an investor can hedge outgrowers to install furrow irrigation to avoid this situation, an investor can against this risk by purchasing futures systems to more effectively utilize Lake solidify the relationship with outgrowers in more stable currencies. Sugar in Kisumu, Kenya 23

Social benefit of investment

Although there are a number of By investing in the sugar industry and Although there are a number of political, regulatory, and operational up-to-date machinery, workers will gain positive social benefits, there is the risks associated with an investment access to new technologies to enhance potential for the investment to have a in the Kenya sugar industry, there is a efficiency and increase productivity. In negative effect on the environment. seemingly large positive social impact addition, by providing well-paying jobs The creation or refurbishment of a on Kisumu and in Kenya. According to to educated individuals, others may be sugar mill may lead to increases in air, industry participants, the construction of motivated to pursue higher education, soil and water pollution, and soil erosion a Greenfield sugar mill would generate thus increasing the percentage of the as well as potential loss of habitat for approximately 400 new permanent jobs population with advanced degrees. a number of animals leading to less and significantly increase the casual biodiversity. However, the Kibos sugar labor workforce along the value chain. On a macro-level, investment in a mill, by utilizing previously fallow land, Investments in the refurbishment of a high-potential sector, such as the has actually improved the condition of sugar mill or the construction of a new sugar industry, may enable the Kenyan the soil surrounding their mill (Industry facility can lead to indirect job creation government to make investments in participant interview 2008). Thus, there in a variety of supporting industries other areas through increased revenues is the ability to mitigate any potential including construction and transportation. from economic activities. negative environmental impacts. 24 Sugar in Kisumu, Kenya

Investment summary

There are many factors influencing piped water and electricity. Currently, low factory utilization due to the lack of investment in Kisumu. The most 14 percent of the roads in Kenya are research and development investment influential factors an investor needs to paved, and less than 40 percent of the into new technologies. Lake Victoria concern him or herself with appear to be population has access to piped water has the potential to provide moisture the regulatory environment, the state of (Millennium Cities Initiative 2007, p.20). for soil, making sugar harvesting more infrastructure, the availability of human Industry sources indicate that investors fruitful and profitable; however, it capital, and the state of the current will need to provide funding to assist is not currently being utilized as the manufacturing process. Regarding the in infrastructure development in order primary source for irrigation or other regulatory environment in Kenya, a to enhance their manufacturing and activities. Research indicates that foreign investor must be able to obtain allow their business accessibility to increased expenditures for research government approval for permits and to export markets. and development need to be made obtain and secure land leases in a timely to modernize the harvesting process and cost-effective manner. At present, The availability of labor to develop and develop furrow irrigation systems the policies and licensing requirements or refurbish a sugar mill is another utilizing Lake Victoria. constrain the ease of execution for major investment consideration. In foreign investors in Kenya. Land leasing order to effectively own and operate The Kibos sugar mill, the newest and and licensing is difficult to obtain and a sugar mill, there needs to be steady perhaps the most technologically can be delayed significantly based on supply of workers for construction advanced mill in the Kisumu area, is industry participant feedback. In order to and operation purposes as well as a owned by the Kibos Sugar and Allied make the regulatory environment more trained management group. Fortunately, Industries, a subsidiary of Chanan appealing to foreign investors in Kenya, the Kenyan workforce is held in high Agricultural Contractors (CAC). CAC industry participants have indicated that regard for both skilled and unskilled labor. was started by a large-scale sugar farmer the government policies to legally protect In addition, there is an unemployment in the Kibos area, located just outside of foreign investment in Kenya need to be rate of approximately 40 percent in the Kisumu. According to industry sources, strengthened and adhered to as law. country, further supporting that there is due to the owner’s family ties to both Moreover, land needs to be made readily a supply of workers. the community and the government, the available and licensing needs to become CAC was able to obtain the necessary more attainable. Manufacturing considerations include building and operation permits needed operating costs and efficiency to begin operations quickly and easily. Regarding the state of infrastructure improvements for investors. A Industry sources have indicated that it in Kenya, the roads and railways must modern harvesting process and would be necessary for an investor to be suitable for heavy vehicles, and the effective utilization of Lake Victoria as have significant relationships with either conditions should allow for easy and a resource needs to be implemented. the community at large or the Kenya efficient travel. Furthermore, the majority At present, there are primitive government if they desire to begin of the population must have access to harvesting processes in place and operations in a reasonable time frame. Sugar in Kisumu, Kenya 25

Conclusion

The current state of the sugar industry The ability for an investor to invest is such that there may be potential for in Kenya has been made difficult by an investor to play a significant role in government regulations; however, the future of the industry. However, recent government actions have government regulations and requirements been taken to attract more foreign may pose various challenges for investment into the country. It investors. Based on research and remains to be seen whether these analysis, it appears that currently the initiatives will have their desired more economically viable option for an affect or whether they will be investor is the construction of a new enforced effectively to create the Greenfield sugar facility as compared to environment necessary for foreign the refurbishment of an existing mill. investment in the country. 26 Sugar in Kisumu, Kenya

References

ActionAid International, “Impact of Sugar Import Surges on Kenya”, September 2005.

Africa News, “Kenya; Sugar Board Faces Test in Reforms to the Sub-Sector”, “Kenya; Country Beats the Odds to Improve Sugar Production”, June 2008.

Bear Stearns & Co. Inc, “Brazilian Sugar and Ethanol”, July 2007.

Business Daily, “Kenya: Endless Safeguards Hurt Free Trade”, May 2008.

CapitalIQ database

CGD Bills Digest, “The Trouble With the Sugar Industry”, 2004.

CGD Bills Digest, “Stirring up the Sugar Industry”, June 2005.

Common Market for Eastern and South Africa, “COMESA Aide Memoir”, February 2008.

EAC Partnership, “East African Community – European Community Economic Partnership Agreement”, September 2007.

Export Processing Zones Authority, “Kenya’s Sugar Industry 2005”, 2005.

Industry participant interviews, 2008.

International Finance Corporation and World Bank, “Doing Business 2008: Common Market for Eastern and Southern Africa (COMESA)”, 2008.

International Monetary Fund, “World Economic Database”, 2008.

Kegode, Peter, et al., “The Challenges And Way Forward for the Sugar Sub-sector in Kenya”, 2003.

Kenya-Advisor, Facts About Kenya, 2008, http://www.kenya-advisor.com/.

Kenya Commercial Bank Limited, “Mumias Sugar Company Ltd. Prospectus 2006”, 2006. Sugar in Kisumu, Kenya 27

Kenya Sugar Board Statistics

Kestrel Capital (East Africa) Ltd., Equity Research: Mumias Sugar Company Ltd., November 2006.

KPMG LLP, “Kisumu Kenya: Potential opportunities for investors”, May 2008.

LMC International Ltd., “The LMC World Wide Survey of Sugar and HFCS Production Costs”, 2005.

Millennium Cities Initiative, “Invest in Kenya: Focus Kisumu”, July 2007.

National Bureau of Statistics, “Leading Economic Indicators”, May 2008.

Nyangito, “Agricultural Trade Reforms in Kenya Under the WTO Framework”, 2007.

Organization for Economic Co-Operation and Development and the Food and Agriculture Organization of the United Nations, “OECD and FAO Agricultural Outlook: 2008–2017”, 2008.

Odhiambo, Allan, “Kenya Sugar Board to Review Stalled Sale of Factories”, 2008.

SUCAM, “A Summary of Investment Recommendations from the Sugar Industry Task Force”, 2003.

The Earth Institute’s Millennium Cities Initiative at Columbia University, “Attracting Investment to Kisumu: Opportunities and Challenges”, 2007.

The Economist, “Inflation’s Back”, 2008.

The Economist Intelligence Unit, “Kenya”, 2008.

The Nation (Kenya) AAGM, “Lobby Opposes SH3 Billion Sugar Project”, June 2008.

Transparency International, “The Kenya Bribery Index 2006”, 2006.

Tsavo Securities Limited, Analyst Report: “Mumias Sugar Company”, March 2007. us.kpmg.com

For more information, please contact:

Chris Gottlieb Principal, Transaction Services +212-872-6794 [email protected]

Jim Geisel Senior Manager, Advisory +704-371-8104 [email protected]

The information continued herein is of a general nature and is not intended to address © 2008 KPMG LLP, a U.S. limited liability partnership and the circumstances of any particular individual or entity. Although we endeavor to provide a member firm of the KPMG network of independent accurate and timely information, there can be no guarantee that such information is member firms affiliated with KPMG International, a Swiss accurate as of the date it is received or that it will continue to accurate in the future. cooperative. All rights reserved. Printed in the U.S.A. No one should act upon such information without appropriate professional advice after KPMG and the KPMG logo are registered trademarks of a thorough examination of the particular situation. KPMG International, a Swiss cooperative. 19684NSS

MCI AND VCC WORKING PAPER SERIES ON INVESTMENT IN THE MILLENNIUM CITIES

No 05/2008

ASSESSING INFRASTRUCTURE CONSTRAINTS ON BUSINESS ACTIVITY IN KISUMU, KENYA

Jacob Winiecki

OCTOBER 2008

432 South Park Avenue, 13th Floor, New York, NY10016, United States Phone: +1-646-884-7422; Fax: +1-212-548-5720 Websites: www.earth.columbia.edu/mci; www.vcc.columbia.edu

MCI and VCC Working Paper Series No 05/2008

As part of this effort, MCI helps the Cities to create employment, stimulate enterprise development and foster economic growth, especially by stimulating domestic and foreign investment, to eradicate

extreme poverty – the first and most fundamental MDG. This effort rests on three pillars: (i) the preparation of various materials to inform foreign investors about the regulatory framework for investment and commercially viable investment opportunities; (ii) the dissemination of the various materials to potential investors, such as through investors’ missions and roundtables, and Millennium Cities Investors’ Guides; and (iii) capacity building in the Cities to attract and work with investors.

Correspondence should be directed at any of the editors.

A separate MCI working papers series on the social sector will be available.

For more information, please refer to the MCI website at: http://www.earth.columbia.edu/mci/ and

the Vale Columbia Center website at: http://www.vcc.columbia.edu/.

TABLE OF CONTENTS

Executive Summary ...... 4 1. Purpose...... 6 2. Methodology...... 6 2.1 Limits to Research...... 7 3. Summary Results...... 7 3.1 Electricity...... 8 3.2 Liquid Fuels...... 9 3.3 Water...... 10 3.4 Wastewater ...... 11 3.5 Solid Waste...... 11 3.6 Telecommunications...... 11 3.7 Ground Transport...... 12 3.8 Air Transport...... 15 3.9 Land ...... 15 3.10 Security ...... 16 3.11 Other Considerations ...... 16 4. Sectoral Comparison ...... 16 5. Opportunities for Investment in Infrastructure...... 18 6. Conclusion ...... 20 7. Annex ...... 21 8. References...... 25

Assessing Infrastructure Constraints on Business Activity in Kisumu, Kenya

Jacob Winiecki Executive Summary

The success of commercial activities in any city depends in great part upon the quality of infrastructure services available to businesses including (but not limited to) reliable electricity and liquid fuel supplies to power engines, sufficient supplies of clean water for irrigation and industrial processes, and reliable roads for obtaining raw materials and transporting finished goods in a timely and cost efficient manner. Poor quality infrastructure can drive up the cost of doing business and constrain economic growth in any city.

The current state of infrastructure and related services in Kisumu presents a range of obstacles to commercial activities in and around the city. This study found that the major infrastructure constraints to business growth in Kisumu are related to poor roads outside the city limits, power shortages, liquid fuel supply shortages, and poor quality and unreliable water supply. The poor condition of roads outside of Kisumu – particularly the main artery connecting the city with Nairobi – is by far the largest infrastructure constraint impacting business activity in the region. Fourteen out of 21 businesses interviewed in this study indicated that poor quality roads are the number one infrastructure limitation preventing their business from reaching its full potential. Poor quality roads cause damage to vehicles, increase transport time, limit tourism potential, and drive up the cost of obtaining raw materials and transporting finished goods. The current condition of roads connecting Kisumu with other major cities can be partially attributed to increased traffic resulting from a breakdown in lake and rail transport over the last two decades connecting Kenya with Uganda, Tanzania and other nearby countries.

Following road infrastructure, businesses identified the poor quality and unreliable supply of electricity as the largest constraint to business activity in Kisumu. Although electricity supply has increased over the last five years, maintenance of distribution infrastructure has been largely ignored over the last twenty years leading to frequent power outages that can cripple commercial activity. Of the 21 businesses interviewed, 19 experienced power outages of more than 15 minutes more than once per week. Most businesses have at least one source of back-up power on site (usually a diesel-powered generator), though several businesses must close down operations when the power cuts off. The quality of electricity is also an issue in Kisumu with power surges frequently destroying equipment.

Many businesses in Kisumu rely upon diesel fuel to power machines and backup generators. Shortages in diesel fuel have become a major constraint to business in Kisumu, largely due to an insufficient capacity at the main refinery in Mombasa. Fifteen out of 21 businesses interviewed indicated that the supply of diesel in Kisumu does not keep up with demand, causing shortages that can last up to three to four weeks. In response, many businesses must invest in underground backup tanks in order to ensure continuous operation, locking up large amounts of capital that could be used for other purposes.

The quality and unreliable supply of water is also a major constraint to business activity in Kisumu. Eleven out of 21 businesses experience water supply interruptions – three experiencing interruptions once per month and eight experience shortages once per week or more. To cope with supply interruptions, businesses are forced to invest in large back-up tanks or add boreholes to facilities. The poor quality of water – particularly water obtained from the Municipality – forces many businesses to expend resources on the purchase and installation of internal water treatment systems.

Collectively, these obstacles drive up the cost of doing business in Kisumu considerably. However, it is encouraging to note that most of the businesses interviewed for this study can still operate profitably even when faced with major infrastructure constraints. Additionally, several categories of infrastructure investigated in this study have had minimal negative impacts on businesses, including: telecommunications, security, wastewater, and access to land. Additionally, respondents identified several opportunities for investment in infrastructure and related services that could prove to be both profitable enterprise activities and improve the local operating environment for commercial entities, including: improved lake and rail transportation, privately managed roads, solid waste and recycling collection, public transportation and building infrastructure.

1. Purpose

The primary objective of this study is to better understand the current infrastructure constraints faced by commercial enterprises active in the Kisumu region and to identify key opportunities for investment in infrastructure that could enable existing and future businesses to operate at full capacity. Prior to this study, anecdotal evidence suggested that most businesses in Kisumu were operating below full capacity due to shortages of water, electricity, and fuels as well as the high costs of transporting raw materials and finished goods resulting from poor road infrastructure. Research conducted by MCI in Kisumu over the last year – through a literature review and interviews with government officials – has also identified infrastructure as a main constraint to business growth in the region. This study aims to understand how the current state of infrastructure impacts commercial activity in Kisumu from the perspective of the businesses themselves. Most importantly, this study was undertaken to understand the various coping mechanisms used by businesses to deal with infrastructure challenges and to solicit recommendations for infrastructure investment opportunities.

For the purposes of this study, infrastructure includes energy (electricity and fuels), water, wastewater, solid waste, ground and air transportation, telecommunications, buildings, land and security. 2. Methodology

This study presents an overview of how the current state of traditional infrastructure constrains industrial activity in Kisumu. The report also identifies areas of potential investment in infrastructure expansion and improvement. Data has been obtained through interviews with management staff of 21 commercial enterprises, using a standard infrastructure survey (see Appendix). All responses have been reported anonymously. The researcher aimed to gather perspectives from a random sample of commercial entities and thus targeted a diverse group of small (fewer than 20 employees), medium (20-100 employees), and large (more than 100 employees). Participating interviewees operate commercial ventures in a wide range of sectors as outlined in the table below. Over 40 businesses were invited to participate in this study. The field research was conducted in June 2007.

Businesses Interviewed

Date of Interview Sector Products/Services Number of Employees

6/15/07 Fisheries Lake fish processing and About 100 distribution 6/15/07 Agriculture Rice farming and processing About 100 6/18/07 Agriculture Industrial ethanol and yeast About 175 Production 6/18/07 Food production Grain milling and bread baking Over 500

6/20/07 Transportation Vehicle sales and About 50 maintenance 6/20/07 Agriculture Sugarcane farming and Over 500 transport 6/21/07 Real estate Sales and marketing of Less than 10 housing and commercial space 6/21/07 Transportation Rail transportation of people Over 100 and goods 6/21/07 Waste disposal and Plastic recycling and Over 25 recycling processing 6/21/07 Hotels and restaurants Restaurants and catering About 80 Services 6/22/07 Mining Limestone mining and Over 50 processing 6/25/07 Security Guard security and home/ About 1000 business security systems 6/26/07 Transportation Lake transportation of fuel Less than 20

6/27/07 Food production Bread bakery Over 100 6/27/07 Agriculture Sugarcane farming and Over 100 processing 6/27/07 Transportation Lake transport of people and About 30 vehicles 6/27/07 Food production Sugar and flour Over 100 confectionaries 6/28/07 Transportation Cargo clearing and forwarding Over 50 6/28/07 Construction Road construction/ Over 300 maintenance and civil engineering services 6/28/07 Hotels and restaurants Upper market hotel Over 100 6/28/07 Agriculture Various farming and Over 500 agriculture processing activities

2.1 Limits to Research A total of 28 interviews were conducted for the purposes of this study. Data from seven of the 28 interviews conducted during the field visit is not included in this analysis for various reasons, including an unwillingness on the part of the interviewee to release sensitive information; and the relatively small size (fewer than three employees) of a particular business. Several non-governmental organizations were interviewed, but their responses were not included as they do not represent commercial interests. The limited amount of time on the ground also placed some constraints on the research.

3. Summary Results

The following is a summary of responses obtained through interviews conducted in June 2007.

3.1 Electricity Supply Interruptions – All businesses interviewed1 with connection to the electricity grid (20/21) experience power outages lasting at least 15 minutes more than once per week. These weekly outages last on average 1-4 hours, although three businesses indicated that these outages can sometimes last up to 24 hours straight, without prior notice. However, most (14) businesses indicated that supply and delivery has improved over the last five years – particularly during the last two years. One enterprise – a security company – indicated that electricity is the #1 infrastructure constraint to their business. On the security side, power outages can shut down remote alarm systems and disrupt communications between the headquarters office and homes and businesses that are protected.

Electricity distribution infrastructure outside of Kisumu. Photo by author.

Cost of Electricity – The cost of electricity depends upon the scale of monthly usage, but some examples include: US$22,000/month for a plastics recycling facility; US$411/month for a vehicle sales office and repair workshop; US$7,350/month for a fisheries processing plant with 100 employees.2 Two businesses indicated that the per-unit cost of electricity produced by a diesel generator is twice that of per-unit electricity obtained from the grid – largely due to the increasing cost of diesel throughout East Africa. Businesses in Kisumu pay for electricity on a per-unit consumed basis. This rate is fixed for commercial enterprises, though some large industrial entities have negotiated with the Government and service provider directly to lower per-unit costs and to receive priority supply. Respondents did not have access to data on initial grid connection costs.

Coping with interruptions – Fifteen of 21 businesses interviewed rely on diesel generators exclusively for backup power, while one business relies on an inverter and battery set. The remaining five have no coping mechanisms in place to deal with power outages. As a result, these businesses must close down operations during power outages.

Service Response – Only one of 21 respondents indicated that their business has experience contacting the electricity service provider in cases of outages or other problems. According to the respondent, contact with the service provider has been fruitful only “when you

1 It should be noted that one respondent does not have access to grid electricity and relies exclusively on diesel fuels for powering all machinery and appliances. 2 Based on a July 2007 exchange rate of US$1=68Kshs.

physically visit the service provider’s offices and transport them – at your own expense – back to your facility.”

3.2 Liquid Fuels The main liquid fuels used for commercial purposes in Kisumu are light and industrial diesel, which are used mainly to power generators during power outages. Only two of 20 businesses indicated that they do not use diesel – one because it currently cannot afford the purchase of a diesel generator and the other because it relies on an inverter and batteries. Other fuels used by the businesses interviewed include liquefied petroleum gas (LPG), heavy fuel oil (HFO), industrial lubricants and Freon.

Liquefied petroleum gas (LPG) for sale at a petrol station in Kisumu. Photo by author.

Supply Problems – Local shortages of liquid fuels – particularly light and industrial diesel – are an increasingly disruptive constraint on businesses in Kisumu. The two lake transport enterprises interviewed for this study indicated that shortages of diesel fuel are the #1 infrastructure constraint on their businesses. Over 70% of respondents (15/21) indicated that the supply of liquid fuels – particularly diesel – does not keep up with their businesses’ demand. Roughly a quarter (5/21) of businesses interviewed have not experienced major problems due to liquid fuel supply shortages. However, five businesses indicated that diesel supply shortages can last an entire month.

Cost – As of July 2007, diesel fuel was being sold at petrol stations in Kisumu for US$0.96 (65.8Kshs) per liter.3 Cost data was not available for Freon, heavy fuel oil, and liquefied petroleum gas.

Coping Mechanisms – Many businesses keep large supplies of diesel fuel in stock to deal with local shortages. This method of coping with low supplies in Kisumu can lock up a large amount of capital that could be used for other purposes. For example, one sugar factory has to keep over 15 days worth of diesel (ca.500,000 liters) on site, at a cost of over US$44,000.4 In dealing with shortages, one business blends light diesel with other fuels; six businesses keep a one to seven day supply in tanks; four businesses keep more than one week’s supply

3 As of October 2008, diesel fuel is 96.8Kshs per liter and petrol is 98.8Kshs per liter. This represents a significant jump from 2007 levels. 4 Exchange rate as of time of interviews was US$1=68Kshs.

in tanks; and two businesses must close down when supplies run out. Besides keeping a large amount of diesel in stock, there are very few options for businesses that rely on the fuel for major processes because shortages usually affect the entire region and Western Kenya. Most businesses attribute such shortages to low refining capacity in Mombasa.

3.3 Water Water Source – A majority of businesses interviewed receive their water from Lake Victoria (6) or the Municipal Water Supply (12). The remaining five businesses pump water from a river within 5km of their facilities. It is important to note that three businesses interviewed receive water from multiple sources – such as springs and boreholes. The amount of water consumed by each respondent largely depends upon the nature of each business’ commercial activities. Examples of water consumption rates include: fisheries – 104m3 per month; bakery – 40 m3 per day; sugar and flour confectionaries – 30m3 per day.

Water being pumped from Lake Victoria to an ethanol facility outside of Kisumu. Photo by author.

Supply Interruptions – Eleven out of 21 businesses experience supply interruptions – three experience interruptions once per month and eight experience shortages once per week or more. It is not clear what causes these problems, as the researcher did not conduct interviews with the municipal water supply company to obtain raw data on supply interruptions. However, several businesses interviewed suggested that interruptions are caused by outdated distribution infrastructure and insufficient pumping capacity on the part of the municipality. On average, respondents indicated that interruptions were 2-4 hours each but sometimes lasted a full day. A sugar and flour confectionaries business indicated that the municipal supply can only meet one third of daily demand for water, forcing the business to operate well under full capacity. One agricultural business indicated that rains over the last few years were erratic and forced his company to invest in irrigation systems given this newfound unpredictability regarding rainfall levels.

Cost – The researcher was not able to obtain cost data for all sources of water utilized by businesses in Kisumu. However, two businesses interviewed indicated that water obtained from the Kisumu municipality costs an average of 0.067Kshs – 0.010Kshs per liter.

Coping with interruptions – Of the eight businesses which experience water supply interruptions at least once per week, five have backup tanks on site. The remaining three cope with shortages by pulling water out of a facility swimming pool (hospitality sector),

tapping into a backup borehole on site (agricultural), and obtaining water from Lake Victoria transported via jerrycans in company trucks (plastics recycling). None of the businesses interviewed initiate contact with the service provider in times of supply interruption.

Water Quality – The quality of water used for business purposes in Kisumu varies depending on the source. For this study, respondents were asked to offer their own perceptions of the quality of water received. Water from Lake Victoria was characterized as “bad” by two respondents and “very bad” by four. The municipal water supply is perceived to be better, with five people indicating that the water is “average” and six indicating it was “bad” or “very bad.” Water from rivers was perceived to be “average” by two respondents and “very bad” by one. Nine out of 21 respondents (42%) indicated that their business treats water internally.

3.4 Wastewater As compared to water supply, treatment and disposal of wastewater is a very minor issue for most businesses. Six respondents indicated that their business disposes of wastewater in septic tanks on site; 11 businesses dispose of wastewater directly into the municipal sewerage system; and three treat water internally and return it either to Lake Victoria or to their river sources. None of the businesses interviewed outsource wastewater treatment to a third party. The researcher was not able to obtain cost data on wastewater disposal.

3.5 Solid Waste Five out of 21 respondents indicated their businesses do not produce measurable solid waste products. Of the remaining 16 respondents, methods of waste disposal include incineration (six responses), recycling or selling waste products to other vendors (three responses), informal private collection (two responses), or transport to the municipal waste site by the businesses themselves (five responses).

Cost – Respondents indicated that the municipal waste site charges 700-2,000Kshs (US$10.75-$30.76) per visit regardless of the weight of the waste being disposed of. Therefore many businesses are forced to hold onto waste until there is sufficient accumulation to fill an entire truckload. One restaurant business interviewed pays roughly 30,000Kshs (US$460) per month to an informal enterprise to collect and dispose of the enterprise’s waste on a weekly basis.

3.6 Telecommunications At present, the state of telecommunications infrastructure does not seem to pose a real constraint on business activity in Kisumu.

Telephone – Of the 21 businesses interviewed, 16 rely on landline telephones as their primary source of communication; the remaining five rely primarily on mobile phones. None of the 21 businesses interviewed experience major interruptions in landline or mobile phone services.

Internet – Nineteen of 21 businesses have internal access to the Internet. Of these businesses, 10 have basic dial-up connections and five use General Packet Radio Service (GPRS). GPRS is a mobile data service that enables users to transfer data via the cellular

network, usually using a Universal Serial Bus (USB) card. Three businesses interviewed have broadband connections and one connects via satellite due to its remote location. Connection speeds for each source were below 32kbs for dial-up, 64kbs for satellite and 32- 116kbs for broadband and GPRS. Only three respondents indicated service interruptions of more than 15 minutes more than twice per week.

Cost – The cost of landline telephone usage largely depends upon service provider, but falls within the range of 6,000-12,000Kshs (US$92-$184) per line each month. Internet service fees vary depending upon type and speed of connection, service provider, and form of billing – unlimited data transfer vs. pay per unit of data transferred. A rice farming business paid 30,000Kshs (US$460) for installation of dial-up internet connection. This same business pays roughly 23Kshs (US$0.35) per minute of usage. A broadband line with unlimited access costs about US$100-$200 per month for enterprises located in the central business district. Internet access via GPRS USB cards is billed per unit of connection time or per megabyte of data downloaded, depending upon service provider. Respondents using GPRS USB cards indicated average monthly expenditure per card is 4,000-6,500Kshs (US$60-$100).

3.7 Ground Transport The current state of ground transportation infrastructure – roads, rail and lake transportation – presents many challenges to businesses operating in Kisumu. In particular, low usage of rail and lake transport adds to already stressed road conditions across western Kenya.

Roads The current state of roads outside of Kisumu – particularly the main artery connecting the city with Nairobi and Mombasa – is the biggest infrastructure constraint to business activity in Kisumu. Two thirds of respondents (14/ 21) recognized poor quality roads as the most detrimental infrastructure limitation preventing their businesses from reaching full potential. The poor state of major roads in Kenya is a result of many factors, including: low levels of government investment in road construction and, more importantly, road maintenance; high levels of heavy-truck traffic on the Mombasa-Nairobi-Kisumu route carrying goods that could otherwise reach destinations in Western Kenya and other East African countries via rail and lake transport, if appropriate investments were to be made; and politically motivated spending of scarce transportation resources in central Kenya.

Main artery road connecting Kisumu with Nairobi. Photo by author.

Raw Materials and International Freight (Import) – Most businesses interviewed obtain raw materials from outside their main facilities, requiring significant expenditures on ground transportation. 17/19 businesses interviewed that require raw materials receive them via truck and/or tractor. Four businesses that import raw materials and/or supplies indicated that it takes 2-4 days for a single truck to reach Kisumu from Mombasa. A shipbuilding company indicated that it takes 7-10 days for a truck full of parts to reach Kisumu after clearing customs at Mombasa.

International Freight (Export) – Of the 10 businesses interviewed that serve markets outside of Kenya, the main method of transportation used is ship (3), truck (7) and air (1). One company utilizes both air and ground (truck). For a fishing company, it typically takes about 10 hours for a truck to reach Nairobi for export via air.

Cost of International Freight (Export) – For a typical company, local transport (via truck from Kisumu to Mombasa) and clearing of one 20-foot container costs 35,580 Kshs (US$523). Costs associated with transporting the same container via ship as of July 2007 from Mombasa to Dubai and Japan are US$2,200 and US$3,220, respectively.

Cost of Road Transportation – The poor quality of roads connecting Kisumu to other major urban centers impacts the price of doing business and, ultimately, the price of goods and services in the city. Poor roads reduce equipment life, increase costs for vehicle repair and maintenance, and increase the time taken to transport goods. One farming business estimates that its vehicle fleet is not operating at full potential, at significant cost to the business. Due to poor roads, each truck can make two rather than three trips per week. With a total of 30 trucks earning about 200,000Kshs (US$3,075) per trip, this business estimates its losses at over 24,000,000Kshs (US$369,000) per month, due to bad roads. Several businesses interviewed indicated that they have to overload trucks illegally just to break even when transporting long distances from Kisumu.

This research indicates that the already high costs of road transportation have increased over the last few years and continue to go up as roads deteriorate and fuel prices soar. One business dependent on heavy transport indicated that its transport costs have gone up 25% in the last two years alone because of poor road conditions. A food-processing business interviewed has seen its transportation costs within Kenya rise even further. Two years ago, this business could transport a 20ft container by ship from Durban, South Africa, to Mombasa for US$700, and then pay US$1,200 to transport that same container from Mombasa to Kisumu via truck; today, that same container costs over $2,000 to transport just from Mombasa to Kisumu – almost triple what it costs to transport a container from South Africa to the Mombasa port.

Transporting sugarcane to sugar processing facility outside of Kisumu. Photo by author.

Constrained Markets – Central Kenya is now a large market that businesses in Kisumu simply cannot serve, solely on account of poor road infrastructure. First, people do not want to make the trip by motor vehicle due to poor state of the roads and associated safety and comfort issues – impacting the tourism and service businesses that depend on visitors. For example, bakeries in Kisumu can hardly scratch the surface of the huge Central Kenya market, because finished loafs of bread are time-sensitive and are “days older than other bread”5 by the time they reach Nairobi.6

Rail The poor quality of rail service connecting Kisumu with other metropolitan areas is responsible in part for the overuse of roads connecting the city with Nairobi and Uganda. Of the 21 businesses interviewed, only two (both directly related to rail and cargo services), utilized rail for transporting goods or people. One respondent indicated that the poor state of rail infrastructure was the number one constraint to his clearing and forwarding business, because it limits the number of containers transiting through the Kisumu Inland Container Depot (ICD) on a weekly basis. Rail delays also force this business to rely on trucks to transport time-sensitive cargo from Mombasa to Uganda and Tanzania, rather than alternate rail-water options.7 To be financially sustainable, this firm needs to serve two full trains per day, rather than the current 3-4 trains per week. At present, the Kisumu ICD is operating well below its full potential – possibly 1/6 to 1/8 of full capacity – due to poor rail service. The current state of rail service is largely a result of poor infrastructure maintenance since the break-up of the East African Community (EAC) in the late 1970’s.

Lake Transport Kisumu was once the shipbuilding and lake transportation hub for all of East Africa. For various reasons, lake transport infrastructure has degraded to the point where it is hardly utilized for moving people and goods any more. This degradation of rail and lake infrastructure has a negative multiplier effect on roads. At present, almost all people and cargo destined for Uganda, Tanzania, Rwanda, Burundi and Congo must be transported via

5 Quote provided by speaker that wishes to remain anonymous. 6 In fact, one bakery indicated that even an hour’s delay can impact the freshness of his bread, ruling out the possibility of serving markets beyond Nakuru. 7 For example, this business indicated that it takes two days to transport a single container from Mombasa to Kisumu via truck, as compared to the 5-14 days it now takes to transport the same container by rail.

the same one or two Kenyan roads, adding more pressure to already poor road infrastructure.

There are a few commercial enterprises taking advantage of lake transport from the Kisumu port. At present, there are 3-4 privately owned and operated ships transporting mostly diesel oil for cars and finished plastic goods to Mwanza, Tanzania. The ships generally return empty but occasionally bring cotton seed cake and cement. There are also four government- owned ships held over from the original East African Community days – two in Uganda, one in Kenya and one in Tanzanian waters.8 None of the businesses interviewed are currently transporting people or goods to Uganda via Lake Victoria.

Cost – Data on per unit cost of transporting people and goods via lake was not available at the time of this study. One lake transport company mentioned that the business has to pay a $100 per month fee for the ability to dock in Kisumu.

3.8 Air Transport Most businesses interviewed do not take advantage of air for transporting people and goods, mainly due to the high cost of flights and insufficient capacity to handle time-sensitive cargo at the Kisumu airport. At present, the Kisumu airport only handles flights to and from the Nairobi airport. There are no passenger or cargo flights from the Kisumu airport to other regional or international destinations. For the three businesses that do use air transport, it is used mainly to transport new personnel to Kisumu from abroad or to bring spare parts in emergency situations. Only one business regularly uses air transport, though not through the Kisumu airport. This fisheries business trucks refrigerated fish to the Nairobi airport two to three times per week for flights to Europe and the United States.

Cost – For a typical company, local transport (via truck from Kisumu to Nairobi airport) and clearing of one 20-foot container costs 15,000Kshs (US$230). Costs associated with transporting the same container via air to international destinations include:  Dubai – one container (minimum of 1,380kg) costs roughly US$1,500.  Miami – one container (minimum of 1,380kg) costs US$3,900.

3.9 Land Difficulties obtaining land for industrial, agricultural and office purposes can be a major constraint to existing businesses and can limit potential investment in Kisumu. Most businesses interviewed (11/21) indicated that they own the land on which the business operates. The remaining ten businesses lease land directly from the owners.

Land Availability - Twelve respondents out of 19 indicated that there is sufficient amount of land available for industrial purposes, although three indicated that there is not enough available in Kisumu’s more favorable locations. Seven businesses out of 19 respondents indicated that there is not enough land available for expansion – particularly land suitable for industrial purposes, with ample water and electricity services. Four businesses found it very

8 However, three out of the four state-owned ships are currently grounded, largely due to the high costs of insurance.

hard to deal with the long and arduous bureaucratic processes involved with locating land, finding the appropriate owner and registering the land with the municipality. Finally, eight businesses interviewed indicated that even the so-called “available” land has been allocated politically. Therefore, interested businesses may have to pay above-market prices to get the land out of the hands of politically favored owners who tend to retain their land tenure as a sign of their influence.

3.10 Security As in most urban areas in East Africa, one cannot do business in Kisumu without a basic alarm system and fencing around facilities, as well as guard services during night hours (at minimum). Twelve out of 21 respondents indicated that their businesses are affected by security considerations, though all indicated that these were in every case a result of petty theft from individuals inside the company. The average cost of one security guard per month (12 hours per day) is 14,300Kshs, or US$220. One security guard per month at 24 hours per day costs 28,600Kshs, or US$440.

Only three of the businesses interviewed experienced significant losses due to security issues, largely due to hijackings of trucks transporting people or goods from Kisumu to other urban areas. These businesses indicated that these losses were mainly due to the poor road infrastructure, as thieves are attracted to trucks forced to move very slowly because of potholes. Two businesses interviewed have experienced losses due to theft while working in the port of Mombasa. As a response to these transportation security concerns, some businesses have hired security companies to accompany their cargo while in transit. Typical cost for cargo in transit security is 65,000Kshs (US$1,000) per trip, which includes two vehicles, four armed guards, and two crewmembers.

3.11 Other Considerations There are several other infrastructure constraints not captured in the original survey that came out of interviews with businesses in Kisumu. These include:  Customs: For one agriculture-focused business, clearing cargo out of Mombasa port is the company’s biggest infrastructure constraint. This business indicated that it takes an average of four weeks to clear a single container through the port of Mombasa. In response, this business is purchasing its own bonded warehouse at the Kisumu ICD, to begin clearing locally. An agro-processing business and an imported commodities sales firm also indicated a month’s delay in clearing cargo at the Mombasa port.  Buildings: Four businesses interviewed recognized that a lack of building infrastructure negatively impacts their commercial activities. In particular, there is a lack of housing for all income levels, as well as a shortage of office and retail space in the central business district. 4. Sectoral Comparison

A comparison of infrastructure issues within and across sectors reveals several important insights. For the purposes of this analysis, the researcher compared three broad sectoral categories with more than three businesses each: agriculture (6); food production (3); and transportation (5).

As individual sectors, agriculture and food production both identified “roads” as the number one infrastructure constraint affecting business. The most disruptive infrastructure constraint affecting the transportation sector was split between rail lines (2), fuel shortages (2) and roads (1). All three sectors experience significant power outages at least once per week, with most businesses (9/14) relying upon diesel generators for backup. The transportation sector appears to be the least affected of the three by electricity outages – likely due to reliance upon liquid fuels for core operations. The agriculture sector is heavily dependent upon liquid fuels – particularly diesel – with many businesses locking up significant amounts of capital in backup stocks of fuel in response to recent shortages. Food production and agriculture companies interviewed in Kisumu export a relatively small proportion of finished goods outside of Kenya, mainly due to poor rail and water transportation options. All three sectors indicated an interest in utilizing rail transport if services were improved. Finally, all three sectors are minimally affected by wastewater and solid waste disposal, communications, and security considerations.

The following is a summary breakdown of infrastructure issues affecting each sector:

Agriculture: Agriculture businesses rely heavily on diesel fuel for mechanical power and backup generators. One agriculture business without grid connection relies solely on diesel for electrification and mechanical power purposes. All five agriculture businesses receive water from outside of the municipal supply: Lake Victoria (2), directly from a river (2) and on-site spring and boreholes (1). Three out of five agriculture businesses rely on mobile phones as their main form of communication – mainly due to the remoteness of facilities. Three out of five agriculture businesses access the internet via a satellite or GPRS USB card. All five agriculture enterprises use trucks to transport raw materials – three of the five also use tractors. All five agriculture businesses indicated that they would take advantage of rail if services were improved – potential uses include transporting raw materials to facilities and finished goods to distant markets, and for importing equipment. Two out of five agriculture companies use air transport only in emergencies for acquiring equipment that may otherwise take weeks to reach Kisumu via ground transport. Three out of five businesses export finished products outside of Kenya and they all rely on trucks.

Food Production: All three companies within the food production sector experience electricity outages at least once per week and rely upon diesel generators for backup power. All three businesses receive water from the municipal water supply and dispose of wastewater via the municipal sewerage system. All three rely upon landline telephone lines as a main form of communication and rely upon trucks for transporting raw materials. None of the food production businesses use rail transport currently but all would if services improved. Two out of three businesses utilize the municipal dump to dispose of solid waste.

Transportation: These five businesses represent a diverse set of transportation options – one ferry company, one shipbuilding and lake transportation business, a vehicle sales and maintenance business, a cargo clearing and forwarding enterprise, and a company currently managing the rail system. Four out of five transportation businesses experience power outages at least once a week. Three out of these four do not have a source of backup power and must close down

office operations when outages occur. Three out of five businesses receive water from Lake Victoria while the remaining two use the municipal water supply. Two out of five do not have access to the internet. All three of the businesses with internet capabilities use dial-up connection. Two out of five businesses utilize rail to transport goods and/or people – the other three would utilize rail if services improved. 5. Opportunities for Investment in Infrastructure

In addition to structured interview questions, respondents were asked to identify opportunities for investment in Kisumu’s infrastructure. The following summarizes the various opportunities identified by the business community themselves.

 Air Transport: Several businesses not currently utilizing air for transporting people or goods indicated a desire to do so, if prices were more competitive and/or if the Kisumu airport was upgraded to include better cargo facilities. In particular, two businesses indicated a desire to ship fresh fish to European markets directly from Kisumu in the near future.

 Lake Transport: Transport via ship on Lake Victoria is drastically underutilized at present. Kisumu is well-positioned to lead the East Africa region in both shipbuilding and transport of goods and people from what was once the region’s best dry dock. All businesses interviewed for this study with export activities to Uganda indicated that they would take advantage of lake transport if it were an option. Kisumu already has a full shipbuilding workshop under the management of Rift Valley Railways, with grid connection and unused equipment. There are a few small-scale shipbuilding operations in Kisumu and Mwanza, mostly rehabilitating boats that are, in most cases, decades old and have been lying on the bottom of Lake Victoria. Improving conditions for lake transport will also require investment in upgrading the lake’s port facilities, including the construction and management of warehouses and new docks.

 Railway Transport: As mentioned in section 3.7, only 2/21 businesses interviewed for this study use the rail system for transporting people or goods. However, all 19 of the respondents not currently using the service indicated that their businesses would use the rail if services improved. In particular, businesses would like to see increased traffic of trains into and out of Kisumu; reduced trip times; demonstrated improvements in safety, and investments in the rail line infrastructure. Improvements in rail service would likely involve large investments in rail line infrastructure that may be beyond the mandate of the organization managing rail operations. Business heads suggested that the KPA open up concessionary rates at the Kisumu ICD.9

 Privately managed roads: Although politically difficult, there is an opportunity to transfer construction and management of roads to the private sector in western Kenya.

9 At present, the cost is the same to clear in Mombasa and Kisumu; one idea would be to offer half-rate in Kisumu and full rates in Mombasa.

Additionally, there is a possibility to make the main artery between Nairobi and Kisumu a privately operated toll road that would charge a small user fee. Six out of 21 businesses interviewed indicated a willingness to pay up to 5,000Kshs (US$75) to use a paved and well-maintained road. There are several construction firms in Kisumu with extensive experience building and repairing tarmac roads which could undertake this work.

 Public Transportation: Three businesses recognized a need to develop a comprehensive public transportation system connecting the central business district with residential neighborhoods and the airport. In the near term, this could take the form of organized bus routes similar to those in Nairobi and could mature into a light-rail system.

 Solid Waste and Recycling: At present, the Kisumu municipality has low capacity to serve the garbage collection and disposal needs of both the business and residential communities. Several businesses interviewed outsource the solid waste collection and transport to largely unorganized and informal companies run by private individuals. However, many businesses still rely on internal resources for the transport and disposal of solid waste, demonstrating a largely unmet demand for private garbage collection. Additionally, the municipality does not have the resources to separate recyclable materials from perishable goods. One recycling company interviewed for this study indicated that the business is operating at only half-capacity due to low supply of pre-sorted waste. There is a clear opportunity to develop a profitable, privately managed garbage and recycling collection business to fill these gaps.

 Building Infrastructure: As reported above, a number of businesses alluded to the tremendous shortage of building infrastructure in Kisumu, creating significant investment opportunities, particularly in the construction of low- and middle-income housing, medium-priced and upscale hotels, office and retail space and secure warehousing at the internal container depot and port.

6. Conclusion

Given the range of infrastructure obstacles presented in this paper, it is encouraging to note that most of the businesses interviewed are operating profitably in the face of such tremendous challenges. As recognized by respondents, Kisumu offers many benefits to potential investors, including: a large labor force, secure and reliable telecommunications services and a wide range of commercially viable opportunities. Additionally, several of the infrastructure constraints presented in this study can be thought of as opportunities. For example, a lack of organized solid waste collection disposal points to an opportunity to operate a formal waste disposal business with a largely untapped residential market. A local shortage of office, retail, and residential buildings is an opportunity to invest in a largely unmet demand for building infrastructure. This research also indicates that there is sufficient demand for lake and rail transport which could be both profitable to a commercial enterprise and reduce pressure on already constrained road infrastructure.

7. Annex

Study Questionnaire Assessing industrial infrastructure

1. Electricity 1.1. Current options Describe your current electricity connection. Connected - What is the connection voltage and current? Do you have your own sources of electricity? What is your current electricity demand in watts or kilowatts? If grid-based electricity supply increased, what would be your peak demand (i.e. what would you need to operate at full capacity)? 1.2 Quality of supply Does the supply keep in the limits of the promised frequency? and interruptions and How reliable is the supply? How frequently is supply vendor response interrupted? How long do service interruptions last? Which form of communication is established with the supplier in case of interruptions? If the connection fails due to problems offsite, how long does it take for the vendor to respond? 1.3 Coping strategies What strategies do you use to cope with low quality supply and supply interruptions? (Generators, closing down, etc.). Describe the type of backup power supply and equipment. What are the costs associated with backup power for your business? 1.4. Cost Do you have a special agreement with the supplier? What is the rate structure? How is the payment arranged? Do the rates seem fair? 1.5. Time to establish a Describe how the connection was established and how long it connection took. What was the contribution of the consumer to establishing the connection? 1.6. Infrastructure and What is the level of technology used? Describe the maintenance maintenance efforts undertaken by the vendor and in-house.

2. Other Energy Options 2.1 Current Options Describe your current non-electricity energy mix (liquid fuels, gases, biomass, etc.) and the services provided by each energy source (i.e. heating/cooling, powering machinery and appliances, cooking, etc.). Describe your current consumption of each energy option. If supplies increased, what would be your peak demand for each fuel? 2.2 Quality of supply Does the supply keep up with your current demand? How and interruptions and reliable is the supply? How frequently is supply interrupted? vendor response Which form of communication is established with the supplier in case of interruptions? If there is interruption in supply for a main fuel type, can your business continue to operate with available substitute fuels? 2.3 Coping strategies What strategies do you use to cope with low quality supply and

supply interruptions? 2.4. Cost Describe the prices and taxes for each energy source. Do you have a special agreement with the supplier(s)? What is the cost structure? How is the payment arranged? Do the rates seem fair? How have prices changed in the last 1, 5, and 10 years? 2.5. Infrastructure and What is the level of technology used? Describe the maintenance maintenance efforts undertaken by the vendor and in-house.

3. Water 3.1. Source Describe your current source of water. Where does the water come from (groundwater, reservoir, etc.)? How far away is the source from your facilities? 3.2. Supply How frequently is supply interrupted? How long do service interruptions and interruptions last? Which form of communication is established vendor response with the supplier in case of interruptions? Is there any fallback available? If the connection fails due to problems offsite, how long does it take for the vendor to respond? 3.3. Quantity How much water is typically consumed for business purposes (irrigation, toilets, cooking, livestock, machinery, etc.)? 3.4. Quality What is your perception of the quality of the water? Have you taken any steps to test the water? Does your firm treat or process water for any purpose? If so, please describe. 3.5. Coping strategies What strategies do you use to cope with supply interruptions? 3.6. Cost What is the rate structure? How is the payment arranged? Do the rates seem fair? 3.7. Seasonality Is there substantial season-to-season variation in quality or reliability of water supply? To what extent is rainwater used for industrial purposes?

4. Wastewater 4.1. Structure of How does your firm dispose of wastewater? Have you wastewater treatment outsourced the wastewater treatment? 4.2. Capacity to handle What pre-treatment is required prior to feeding industrial industrial effluent effluent into municipal systems? 4.3. Regulatory Describe your interactions with the authorities responsible for environment wastewater treatment. 4.4. Cost Describe the cost for wastewater treatment.

5. Telecommunication 5.1. Time to establish Describe how the connection was established and how long it landline connection took. Do you have an operator-handled system or direct dialing? What kind of cable is being used? Are you connected to a digital or analog telephone trunk? 5.2. Cost structure Describe the installation and utilization cost both for landline and cellular connections (local, in-country and calls outside the

country). Include also fax services. 5.3. Internet services Does your business have access to the internet? Describe the providers and connection options. What is the rate structure? What is the method of connection (dial-up, landline broadband, wi-fi, satellite)? 5.4. Internet connection What is the typical connection speed? Do connection speeds speeds inhibit use? How frequently is connection interrupted? 5.6. Internet regulation Does the Government impose any restrictions on your use of the internet?

6. Health and medical care 6.1 Absenteeism Is absenteeism due to illness a problem for your firm? If so, do you have any indication of the main diseases that are responsible for the problem? 6.2 Access to In your perception, do workers have access to adequate healthcare healthcare? Do you provide medical services at the enterprise and in which form?

7. Solid waste 7.1. Availability of What methods are used to dispose of waste (e.g. incineration)? solid waste disposal Is there a recycling system (informal, formal) established? Is service there any quality management in place? Have you outsourced the solid waste disposal? 7.2. Cost Describe the rate structure for disposal. 7.3. Industrial waste What kinds of services and facilities, if any, are available to handle industrial waste?

8. Ground transport 8.1 Domestic services Describe how raw materials are transported to your business and how products/services are delivered to your customers domestically. What is the average transport distance for raw materials? What is the average transport time for raw materials? 8.2. Urban transit How do workers arrive to work? In your perception, is the state of the transport system a barrier to worker productivity? Have you established your own service to bring workers to the plant? Do you own the direct access road to your plant? 8.3. Main statistical Miles of paved road/1000 people (urban area only), miles of indicators paved road/1000 people (state or province).

9. Air transport 9.1. Availability Does your business make use of air for transporting people or goods? 9.2. Frequency of use? If so, how often? 9.3. Cost How much do you pay for air transport on a monthly basis? How have air transport costs changed over the last 5, 10 years?

9.4. Reasons for non- If not, why? use

10. International freight 10.1. Availability Describe the options that your firm regularly considers: Rail? Port? Air freight? 10.2. Cost What is the cost to transport a container to a major European port? What is the preferred method? What is the transit time? 10.3. Storage Are warehouses, including bonded warehouses, and storages, including cold storages, available? Describe how access to storage facilities, including refrigeration, impedes your business.

12. Access to land 12.1. Tenure Does your firm own the land where it does business? If not, why? If so, do you perceive your tenure to be secure? How much did you pay for the land per acre (or hectare)? 12.2. Availability If you wanted to expand operations, is there a sufficient supply of affordable land available to meet expansion needs? How long would it take you to obtain additional land? 12.3. Zoning Are there zoning restrictions that limit what you can do on your site?

13. Security 13.1. Major Are there security considerations that significantly affect your considerations business? 13.2. Defensive What measures does your firm customarily take to ensure the measures security of its facilities?

8. References

Aguilo et al. (2007). “Attracting Investment to Kisumu: Opportunities and Challenges.” School of International and Public Affairs, Columbia University.

International Bank for Reconstruction and Development, World Bank (2005). “Doing Business in 2006: Sub Saharan Africa Regional Profile.” http://www.doingbusiness.org.

Namwaya, Otsieno (2004). “Who Owns Kenya.” East African Standard. http://www.eastandard.net/archives/cl/hm_news/news.php?articleid=1916.

Onyango, George (2007). “An Investment Profiling of Kisumu City.” Prepared for Millennium City Initiative, Urban Management Programme, UN-HABITAT, and Lake Victoria Region Urban Development Network for Improved Urban Environment and Poverty Reduction.

Southall, Roger (2005). “The Ndugu Report: Land & Graft in Kenya.” Review of African Political Economy.

Sweeney, Erin (2007). “Developing Kisumu’s Infrastructure.” John F. Kennedy School of Government, Harvard University.

United Nations Human Settlements Program (2004). “Kisumu City Development Strategies: 2004-2009.” Prepared by Kisumu City Council and Centre for Development and Planning Management.

25 Bamboo Bicycles in Kumasi, Ghana

KPMG LLP MCI and VCC Working Paper Series on Investment in the Millennium Cities No 04/2008

Karl Sauvant, Co-Director, MCI, and Executive Director, Vale Columbia Center on Sustainable International Investment; Joerg Simon, Senior Investment Advisor, MCI; Paulo Cunha, Program Coordinator, MCI; David Ho, Doherty Research Scientist, Lamont-Doherty Earth Observatory, The Earth Institute, Columbia University; and John Mutter, Professor, Earth and Environmental Sciences, Columbia University

As part of this effort, MCI helps the Cities to create employment, stimulate enterprise development and foster economic growth, especially by stimulating domestic and foreign investment, to eradicate extreme poverty – the ﬁ rst and most fundamental MDG. This effort rests on three pillars: (i) the preparation of various materials to inform foreign investors about the regulatory framework for investment and commercially viable investment opportunities; (ii) the dissemination of the various materials to potential investors, such as through investors’ missions and roundtables, and Millennium Cities Investors’ Guides; and (iii) capacity building in the Cities to attract and work with investors.

The Vale Columbia Center on Sustainable International Investment promotes learning, teaching, policy-oriented research, and practical work within the area of foreign direct investment, paying special attention to the sustainable development dimension of this investment. It is a joint program of Columbia Law School and The Earth Institute at Columbia University.

For more information, please refer to the MCI website at: http://www.earth.columbia.edu/mci/ and the VCC website at: http://www.vcc.columbia.edu/.

Table of contents

2 Executive summary

4 Project overview

8 Market opportunity

14 Operational considerations

18 Financial case study

22 Ease of execution

26 Social impact

27 Conclusion

28 References 2 Bamboo Bicycles in Kumasi, Ghana

Executive summary

Introduction

Background and objectives The primary objective of this study was to assess the feasibility and investment opportunity of implementing a bamboo bicycle production facility in Kumasi, Ghana, in conjunction with the Millennium Cities Initiative (MCI) at Columbia University. For this assessment, desk-based research and interviews with industry and regional subject matter specialists were completed to assist with the following objectives: • Understand the current transportation modes and bicycle market in Ghana • Assess customer needs in Ghana to determine the suitability of a bamboo bicycle for rural use • Identify the potential market size and demand • Understand the operational considerations and costs associated with implementing a production facility • Estimate the financial returns from investing in this opportunity

Methodology To meet the objectives, KPMG LLP (KPMG) and MCI conducted desk-based research and interviews with industry participants, academics, government officials, NGO representatives, manufacturers, importers, subject matter specialists, and other industry participants. All analyses and findings in this report were generated by KPMG and MCI and were based on third-party data sources and responses obtained from industry participants as part of the interview program. These findings have been presented in a manner to illustrate possible risks and opportunities to consider. Bamboo Bicycles in Kumasi, Ghana 3

Key ﬁ ndings

Market opportunity According to sources, bicycles generally represent the best mode of transport for rural Ghanaians. However, it is reported that the bicycles currently available to rural Ghanaians are often of poor quality and unsuitable for local needs (Gauthier and Hook 2005, pp. 8–11). Bamboo bicycles may be comparable or superior to current bicycles both in terms of quality and suitability for local needs (Industry participant interview 2008). The annual bicycle market size in Ghana appears to be approximately $11.3 million. However, the total potential annual bicycle market size in rural Ghana appears to be closer to $33.3 million, when including the unpenetrated portion of the market.

Operational considerations It appears the cost of producing one bamboo bicycle is approximately $47 (based on assumed production of 20,000 bicycles per year) (Snapshot Africa 2007). Sources in Ghana suggest that bamboo bicycles should be initially priced at roughly $55 to be competitive and affordable for rural customers (Industry participant interview 2008). The venture appears to be scalable, with adequate sources of material and labor available (GIPC: Cost of Doing Business in Ghana (accessed July 2008)).

Financial case study The potential profitability of a bamboo bicycle facility appears to depend on the scale. As an illustration, sources suggest the five-year net present value (NPV) of a scenario of capturing approximately seven percent of the actual current market, or three percent of the total addressable market (i.e., the annual production and sale of 20,000 bamboo bicycles), is approximately $50,000. A more aggressive scenario of capturing 50 percent of the total addressable market (i.e., the annual production and sale of 333,333 bamboo bicycles) would yield a five-year NPV of nearly $4 million. A potential limitation may be the rate of adoption of bamboo bicycles by the target market (Ghana Country Report 2008, pp. 14–15).

Social impact According to sources, the bamboo bicycles venture also appears to be attractive from a social impact standpoint (Litman and Burwell 2006, pp. 341–347). Better and more useful bicycles could improve the standard of living for rural Ghanaians and could create jobs for inhabitants of the rural areas near Kumasi (Mozer 1989, pp. 8–18). 4 Bamboo Bicycles in Kumasi, Ghana

Project overview

Historical and projected sustained economic growth in Ghana appear to make it an attractive market for the bamboo bicycle new market entry. Bamboo bicycles could offer a reliable mode of transportation and a potentially sustainable business opportunity for the people of Ghana. Due to its strength and other positive attributes, the bamboo that grows abundantly in the rural areas near Kumasi appears to be an appropriate material for building bicycle frames.

Overview of Ghana and Kumasi

Key facts about Ghana Ghana is a country located in western Sub-Saharan Africa covering 230,940 km2 of land. The population of Ghana is 23.9 million, which is 54 percent rural and 46 percent urban. The literacy rate in Ghana is 57.9 percent. The labor force represents 46.9 percent of the population of Ghana. The national currency is the Ghana cedi: USD 1 = GH¢ 0.98.

Ghana key statistics(1) Kumasi key statistics(2) Overview People • Capital: Accra • Population: 1.6 million • Form of government: Multiparty democracy Economy • Currency: Ghana cedi (GH¢) • GDP: 71% services, 24% industrial, 5% • Exchange rate: USD 1 = GH¢ 0.98 agriculture People • Labor force as a percent of population: • Population: 23.9 million 71.4% • Urban: 46%; Rural: 54% • Unemployment rate: 16% • Median age: 20.4 years Infrastructure • Population growth rate: 1.9% • Airports: One (Kumasi Airport) • Literacy rate: 57.9% • Roads: 846 km (68% unpaved) Economy • GDP (PPP): $31.3 billion • GDP per capita (PPP): $1,400 • Labor force as a percentage of population: 46.9% • Unemployment rate: 11% (2000) Land use • Total land: 230,940 sq km • Arable land: 17.5% (40,415 sq km) Infrastructure • Railroads: 953 km • Roads: 62,221 km (16% unpaved) • Airports: 12 (7 with paved runways)

Sources: (1) IMF: World Economic Outlook Database 2008 (accessed July 2008); (2) Ghana Districts (accessed 2008). Bamboo Bicycles in Kumasi, Ghana 5

Historical and projected GDP growth Key facts about Kumasi With a GDP of $31.3 billion in 2007, Ghana has the 13th-largest economy in Africa. Kumasi is the second-largest city in Ghana The GDP per capita in Ghana is $1,400 (compared to the GDP per capita in the United (second only to Accra, the nation’s capital). States of $44,000). After 2007, Ghana’s GDP is projected to grow with a compound Kumasi, the capital city of the Ashanti annual growth rate (CAGR) of 9.3 percent until 2013 (IMF: World Economic Outlook region, has a population of 1.6 million. Database 2008 (accessed July 2008)). The projected sustained growth can be The labor force in Kumasi represents attributed to improvements in agricultural practices and increased efficacy of govern- 71.4 percent of the city’s total population mental macroeconomic management initiatives (Industry participant interview 2008). (Ghana Districts (accessed 2008)).

Ghana is the 13th-largest economy in Africa with a GDP of $31 billion in 2007. GDP has grown at a CAGR of 8 percent from 2002 to 2007 and is projected to grow at 9 percent through 2013. Actual – CAGR = 8.0% Average GDP growth in sub-Saharan Africa was 8.3 percent during this period.

Forecast – CAGR = 9.3% The 9.3 percent CAGR is driven by current improvements in agriculture and stability in macroeconomic management.

Source: IMF: World Economic Outlook Database 2008 (accessed July 2008). 6 Bamboo Bicycles in Kumasi, Ghana

Bamboo bicycles project

Bamboo bicycles could

offer a reliable mode of

transportation and a

potentially sustainable

business opportunity for

the people of Ghana.

Source: www.bamboobicycle.org (accessed July 2008).

Background information – Bamboo bicycles Dr. David Ho and Dr. John Mutter at the Columbia University Earth Institute and Craig Calfee at Calfee Design collaborated on the original concept and design of the bamboo bicycle and traveled to Ghana during the summer of 2007 with funding provided from the Earth Institute (Industry participant interview 2008). The team received positive feedback on a prototype of the bamboo bicycle, which was made in the United States and left in Ghana for three months for rural inhabitants to try out. Based on this experience, the team hopes to stimulate the production of bamboo bicycles using the local work force and the bamboo that is currently grown in and around Kumasi (Ho 2007–2008, pp. 1–11).

Advantages of bamboo bicycles Rural Ghanaians could gain several benefits from a bamboo bicycles venture. These include the jobs created from stimulating a nonexistent bicycle production industry in the country and a potentially better transportation alternative. The bicycle is designed to carry large loads, which appears to be one of the most important decision criteria for rural Ghanaians when choosing a bicycle to purchase, since farmers need to transport their goods from the villages to the cities (Industry participant interview 2008). The bamboo bicycle may potentially have a longer life span, since there is likely to be local knowledge of repair techniques, and since the bamboo bicycle’s frame could be easily replaced using locally available bamboo. These bicycles could be better than the bicycles that are currently imported into the country, which are not suited for the hilly terrains or to carry large loads. In addition, the bamboo bicycles are lighter and easier to handle. Bamboo Bicycles in Kumasi, Ghana 7

Background information – Bamboo Bamboo clusters in and around Kumasi Bamboo appears to be an appropriate material to build bicycle frames in Kumasi due to its strength and its abundance in the area. Bamboo was chosen for the bicycle project due to its widespread availability in Ghana.

Key facts about bamboo There are several clusters The tensile strength of bamboo is 28,000 Newtons per square inch, which is greater of bamboo than that of steel (23,000 Newtons per square inch). Around the world, bamboo is within 60 miles used to build furniture and is commonly used as a construction material. Bamboo of Kumasi. can grow up to three to four feet per day in both temperate and tropical climates. The Ashanti region has more than 57 bamboo forest reserves, and there are several clusters within a 60-mile radius of Kumasi. These bamboo clusters are located in areas such as Lake Bosumtwi, Juaso, Nyinahin, and New Edubiase (Akuamoa- Boateng 2008, pp. 1–2). Source: Akuamoa-Boateng 2008, pp. 1–2.

Bamboo and Rattan Development Program The Bamboo and Rattan Development Program (BARADEP), an initiative administered by the Ghana Ministry of Forestry, has a mandate to preserve bamboo while finding practical, sustainable uses for it. BARADEP’s objectives include promoting sustainable uses of bamboo to contribute to people’s livelihoods, reversing the trend of people treating bamboo as a weed by destroying it, and training rural Ghanaians to cultivate bamboo efficiently. With the price of wood increasing, bamboo and rattan have proven to be attractive substitutes. It is important to note, however, that the Ghana Ministry of Forestry, which heads BARADEP, has passed legislation that would increase the price of bamboo from 70¢ per 8-meter culm to $2 per 8-meter culm (Industry participant interview 2008). The price increase would further the BARADEP objective of protecting and increasing the value of bamboo. 8 Bamboo Bicycles in Kumasi, Ghana

Market opportunity

According to sources, the current market for the bamboo bicycles market in Ghana appears to be approximately $14 million annually with growth potential in the unpenetrated market. Current market penetration appears to be approximately 42 percent, leaving a market gap of approximately $19.5 million. The introduction of the bamboo bicycle may help to close the existing market gap, since the bamboo bicycle may be relatively high-quality and better suited to the needs of rural Ghanaians.

Modes of transportation In rural Ghana, bicycles appear to offer cost and mobility advantages over alternative modes of transportation.

Comparison of common modes of transit in Ghana Car Bicycle The infrastructure of roads and Taking into account the up-front and highways in Ghana is reported to be ongoing maintenance costs of the congested, lengthening average travel modes of transit that offer independence, time, which leads to increased petrol industry experts say that bicycles are a and maintenance costs for cars. (1) highly cost-effective way to transport people and goods in a flexible, independent manner. (3) Motorcycle and Scooter Despite their high cargo loads and Train flexibility, the high up-front and ongoing Railroads in the Kumasi area are widely maintenance costs for motorcycles and reported to be in poor condition and in scooters are significant drawbacks for urgent need of extensive repairs. (3) average customers. (3) Bus Industry participants indicate that Taxi buses may be less appealing than Industry experts suggest that the road bicycles for customers and employers network around Kumasi is only 32 percent due to slowness, frequent lateness, paved, causing taxis to be unreliable, and inflexible routing; the ensuing in addition to the long wait times that widespread problem of employees passengers often face when searching arriving at work late by bus reduces for a cab. (4) overall economic productivity. (2)

Sources: (1) Ghana Districts (accessed 2008); (2) Project Africa Interview Program 2008; (3) Gauthier and Hook 2005, pp. 8–11; (4) Dorsey (accessed 2008).

While walking represents an inexpensive alternative to all of these modes of transportation, carrying large loads of goods from the villages is a very labor-intensive task. Thus, the high time and labor inputs required for foot transportation outweigh its evident low cost. Bamboo Bicycles in Kumasi, Ghana 9

Current bicycle market – Competitive landscape

The current market in Ghana is characterized by low-quality imported bicycles that often are unsuitable for use in rural areas (Industry participant interview 2008).

Donated used bicycles imported from Western countries

Suppliers Competitive advantages Competitive disadvantages Some of the main suppliers of donated It appears the main competitive Since these bicycles are used, they used bicycles that are imported from advantage of donated used bicycles from may be prone to mechanical failure. Western countries and sold in Ghana Western countries is that they are usually This tendency to break down can lead include NGOs such as the Village Bicycle sold at discounted rates ($30–70) in to high maintenance and repair costs. Project, Hayley’s Bicycles for Africa, and comparison to the prices of new and Additional disadvantages of donated Recycling Bicycles for Africa (Industry used bicycles imported from developing used bicycles from Western countries participant interview 2008). countries (Gauthier and Hook 2005, pp. include the lack of availability of spare 8–11). Additional advantages of used parts needed to repair them. Finally, donated bicycles from Western countries since these bicycles generally are not include the lack of tariffs on imported designed for load carrying, they may bicycles and the bicycles’ generally be less attractive to customers in rural relative high quality compared to other Ghana, who tend to favor bicycles with new and used bicycles on the market higher load carrying capacity (Industry (Industry participant interview 2008). participant interview 2008).

New and used bicycles imported from developing countries

Suppliers Competitive advantages Competitive disadvantages Some of the main suppliers of new and According to sources, the new and used The new and used bicycles from used bicycles that are imported from bicycles from developing countries have developing countries are generally developing countries and sold in Ghana a strong existing distribution network and designed for recreational use rather include manufacturers from India and spare parts availability. In addition, these than load carrying, making these China that produce old-fashioned bicycles benefit from Ghanaians’ bicycles less attractive to rural “Roadster”-style bicycles (Gauthier and familiarity with them. Like donated used customers. Additional disadvantages Hook 2005, pp. 8–11). bicycles from Western countries, the include their relatively poor quality; it is new and used bicycles from developing not unusual for components to break countries benefit from the lack of tariffs on within two weeks of use (Industry imported bicycles. Finally, as members of participant interview 2008). Lastly, the Chinese middle class grow in number, they are often heavy and hard to they may increasingly choose to purchase handle making them unsuitable for cars rather than bicycles. The resulting carrying cargo on rural terrain. potential excess inventory of Chinese bicycle manufacturers may lead to another competitive advantage for these bicycles in the Ghanaian market: lower prices than Ghanaians are currently paying for them (Gauthier and Hook 2005, pp. 8–11). 10 Bamboo Bicycles in Kumasi, Ghana

Customer selection criteria

Along with a number of customer selection criteria, bamboo bicycles may have an advantage over the metal bicycles that are currently available in Ghana. Metal and bamboo bicycles are comparably priced for the rural market, and bamboo bicycles can carry a much heavier load due to better design and greater strength. Although current bicycles have an established network of independent bicycle dealers and are widely available, bamboo bicycles are estimated to have a better replacement rate of approximately once every five years. Furthermore, bamboo bicycles may be easier to repair, since the replacement material is locally grown, and the knowledge and tools needed for repairs are often locally available (Industry participant interview 2008).

Bicycle market – Demand drivers

Economic, demographic, and social drivers are likely to increase bicycle sales to rural customers.

Economic drivers

Inefficiency of alternative modes Rising GDP Cost of alternative modes of transit of transit Ghana’s sustained GDP growth suggests Rising fuel costs may cause customers The relative dearth of paved roads in the that an increasing number of rural to increasingly choose bicycles over rural areas around Kumasi means that Ghanaians may be able to spend more motorized vehicles for basic transit needs biking and walking are often the only on transportation. Since bicycles are the (Industry participant interview 2008). viable means of transit (Mozer 1989, primary mode of transport for rural pp. 8–18). To many rural customers, customers, rising GDP is likely to lead to bicycles present a more efficient, less an increase in bicycle sales (Industry labor-intensive alternative to carrying participant interview 2008). goods on foot.

Demographic and social drivers

Migration from urban to rural areas Government initiatives encouraging Increasing social acceptance of Due to the surge in agriculture, the school attendance bicycle ridership Ghanaian Government is giving subsidies Ghanaian Government initiatives While riding bicycles is more common in to the urban population to move to rural encouraging parents in rural areas to the north (where the majority of the rural areas; this could cause an increase in ensure that their children attend school areas are located), social acceptance of bicycle sales (Industry participant may drive demand for bicycles, which bicycle ridership appears to be spreading interview 2008). parents often use to transport their to the south as well (Industry participant children to school (Industry participant interview 2008). interview 2008). Bamboo Bicycles in Kumasi, Ghana 11

Current rural bicycle market size

According to sources, the current rural bicycle market in Ghana is estimated to be approximately $14 million per year. This translates into an estimated sales volume of 277,240 bicycles sold per year. To illustrate the possible current rural market size, we multiply the 174 bicycles per thousand households by the 4 million households (with an average of six people per household) in Ghana, yielding a total current market size of approximately 693,100. We multiply this number by the 80 percent of all Ghanaian bicycle sales that are estimated to be attributable to rural consumers and divide it by the two-year estimated replacement rate for bicycles, yielding a number of bicycles sold each year to the rural Ghanaian market of approximately 277,240. Multiplying this number by the $50 average price per bicycle in the rural Ghanaian market yields an estimated rural bicycle market size of approximately $13.9 million per year.

Estimated annual volume of bicycle sales

Current rural bicycle market size

Note: Average household size in Ghana is 6 people. Sources: (1) Dorsey (accessed 2008); (2) Ghana Country Report 2008, pp. 14–15; (3) Project Africa Interview Program 2008. 12 Bamboo Bicycles in Kumasi, Ghana

Addressable market size for bamboo bicycles

According to sources, it seems the annual addressable market size for bamboo bicycles may be 670,000 households. To illustrate this scenario, we used the following methodology.

According to the interviews that we conducted, bamboo bikes appear to be more suitable for rural consumers. An estimated 54 percent of Ghana’s total population of 24 million people live in rural areas, which translates into a rural Ghanaian population of approximately 13 million.

Industry subject matter specialists have suggested that people between the ages of 15 and 64 would ride bikes. This 15- to 64-year-old age range is consistent with the age range of the labor force, which is estimated to be 47 percent of the total population. Therefore, the rural population of working-age Ghanaians is approximately 6.5 million.

It is assumed that those above the poverty line equivalent to $403 per year (approximately 61 percent of Ghanaians) could potentially afford a bicycle. Multiplying the 61 percent of Ghanaians above the poverty line by the 6.5 million working-age rural Ghanaians yields approximately 4 million working-age rural Ghanaians above the poverty line.

Dividing this 4 million by the estimated bicycle replacement rate of two years yields an estimated 2 million potential annual sales to rural Ghanaians.

Finally, dividing the 2 million potential annual sales to rural Ghanaians by the three working-age individuals per average household yields an annual addressable market size for bamboo bicycles of approximately 670,000.

Current rural bicycle market size

Sources: (1) United Nations 2008, p. 1; (2) Project Africa Interview Program 2008; (3) Ghana Country Report 2008, pp. 14–15; (4) Ghana Districts (accessed 2008). Bamboo Bicycles in Kumasi, Ghana 13

Market penetration rate and market gap

Based on sources, the current market penetration appears to be approximately 42 percent, leaving a market gap of approximately $19.5 million. The market gap may be due to the existing bicycles’ relatively low quality and poor fit with the needs of rural Ghanaians (Gauthier and Hook 2005, pp. 8–11). The introduction of the bamboo bicycle may help to close this gap (Industry participant interview 2008).

Potential and addressable market sizes

Sources: (1) Dorsey (accessed 2008); (2) United Nations 2008, p. 1; (3) Project Africa Interview Program 2008; (4) Snapshot Africa 2007; (5) Ghana Districts (accessed 2008). 14 Bamboo Bicycles in Kumasi, Ghana

Operational considerations

Key ﬁ ndings

A bamboo bicycle can be made in approximately one hour at a cost of approximately $47 per bicycle. Total costs to start a bamboo bicycle facility capable of producing 20,000 bicycles per year are approximately $1,019,000, with setup costs totaling to approximately $79,000.

Bamboo bicycle assembly

It is estimated the total assembly time required to build one bamboo bicycle by a two-person team using power tools is approximately one hour. Assembly time with hand tools is approximately two hours (Industry participant interview 2008).

Production format Two production formats were considered for the construction of bamboo bicycles. The first was teams of two people working in tandem at each stage of the production process, and the second was assembly lines consisting of 12 workers, each responsible for a specific task along the assembly line. The two-person format was chosen because, based on estimated build times supplied by sources at the Earth Institute, it is more productive—it provides an output of four bicycles per person per eight-hour working day compared to an assembly line’s output of approximately two and a half bicycles per person per day.

A cost benefit analysis was also performed as to whether or not it would be preferable to use power tools instead of hand tools. While hand tools can be used throughout the process, and indeed must be used at certain points, the increased productivity and efficiency realized through the use of power tools appears to outweigh their higher cost.

Construction process The construction of a bamboo bicycle can be broken down into three steps. First, the bamboo is cut to size and treated with chemicals to prevent splitting. Second, the bamboo tubes are mitered, drilled, and bound together with glue, resin, and fiber, and then left in a jig to dry overnight. Finally, the manufactured components such as the seat, chain, and handle bars are attached to the frame (Industry participant interview 2008). Bamboo Bicycles in Kumasi, Ghana 15

Costs of the venture

Base-case scenario The base-case scenario used to illustrate costs is the production of 20,000 bicycles per year. This is the number of bicycles that can be produced in one year by 20 assemblers, which is the number of assemblers initially expected to be trained by volunteers from Columbia University’s Earth Institute.

Total cost of first-year operations Sources suggest the cost to set up the venture will be approximately $79,000. The operational costs of producing the 20,000 bicycles will be approximately $940,000, or approximately $47 per bicycle. The total first-year cost of forming and operating a bamboo bicycle plant that produces 20,000 bicycles per year is therefore approximately $1,019,000.

Setup costs

Sources suggest the total cost to set up an assembly plant capable of producing 20,000 bicycles per year is estimated to be approximately $79,000.

Estimated setup costs for a plant designed to produce 20,000 bicycles per year the United States to Kumasi. In order to meet production estimates, it is estimated a two-person team receives a complete set of tools. The specific equipment needed is as follows: band saws, chop saws, saw blades, drill presses, assorted end mills, hand tools, bicycle jigs, and seat jigs.

Training – $5,000 The Earth Institute expects training to be conducted over the course of ten days

Sources: (1) Industry participant interview 2008; (2) GIPC: Cost of Doing Business in Ghana (accessed 2008); (3) Snapshot Africa 2007 in Ghana by two volunteers from the Institute. However, the expected training Business formation – $52,325 regime could be modified in order to Ghanaian law requires that wholly owned foreign entities must have a minimum increase the number of assemblers equity capitalization of $50,000. However, if a suitable local joint venture partner trained and thus increase the plant’s could be found, for example an importer of bicycles or bicycle parts, the equity output and revenue. The cost to train capitalization requirement would be reduced to $10,000. In addition to the capital- one worker appears to be outweighed ization requirement, foreign entities must pay registration and licensing fees of by the corresponding increase in approximately $2,325. production, and thus revenue, that the worker produces. Therefore, in practice, Equipment – $21,360 bicycle production should and would not Equipment costs are comprised of the tools required to make the bicycles, the jigs be constrained by the cost of training to make the bicycles on, and the importation costs of bringing the equipment from assemblers, but rather by demand. 16 Bamboo Bicycles in Kumasi, Ghana

Operational costs

The cost to produce one bicycle is approximately $47. The total cost of goods sold is approximately $45 per bicycle. Indirect annual overhead of nearly $41,000 can be allocated on a per bicycle basis at approximately $2 per bicycle.

Estimated operational costs for the production of 20,000 bicycles per year

Sources: (1) Industry participant interview 2008; (2) Snapshot Africa 2007; (3) GIPC: Cost of Doing Business in Ghana, (accessed 2008)

Manufactured components – $35 Manufactured components account for approximately 74 percent of the total cost of producing a bicycle. In addition to the cost of the manufactured components themselves, this cost category includes the binding materials needed for frame assembly, and the transport and tariff costs of importing the components and materials from China and South Africa, respectively.

Ghana generally imposes additional tariffs on imported bicycle parts that, if imposed in this case, would likely make the bicycle too expensive for the target market. However, according to an investment official at the GIPC, it appears that the bicycle parts can be exempted from these tariffs if they are registered with the Ghanaian Government for use in the manufacturing of bicycles. Bamboo Bicycles in Kumasi, Ghana 17

Labor – $5 The legally mandated minimum wage in Ghana is $2.25/hour. While reports were received that assemblers could be hired for approximately $0.80/hour, the labor cost estimates in this analysis are properly based on the legal minimum wage.

Bamboo – $4 Bamboo costs include not only the cost of the bamboo itself, but also transport of the bamboo from the fields to the assembly site, and the cost of the chemicals to treat the bamboo. As previously stated, the cost of bamboo is expected to rise at the end of 2008 due to initiatives that the Government of Ghana has designed to encourage bamboo cultivation in Ghana. It is this expected cost of bamboo that has been used in these calculations.

Indirect costs – $2 Indirect costs are comprised of the salaries for a manager and a foreman at market rates, and the costs of leasing, insurance, electricity, marketing, and license renewal.

The marketing cost was calculated as the cost of giving away 20 bicycles to the target market. Given that the biggest impediment to bicycle sales may be with initial acceptance, a method by which to convey the expected value proposition embedded in the bamboo bicycle is to give bicycles away as promotional items. In addition to the promotional bicycles, advertising emphasizing that these bicycles are adopted for use in rural Ghana from a high-tech design developed in the United States may help gain initial consumer acceptance. It is important for an investor to consider that, depending on how easily the bicycle is accepted by the general public, this venture may require a more extensive marketing program, requiring costs that are not considered here.

Direct overhead – $1 Direct overhead consists of the cost of electricity for the power tools and the depreciation of the tools through use. 18 Bamboo Bicycles in Kumasi, Ghana

Financial case study

In the base-case scenario, it appears the bamboo bicycles venture in Kumasi, Ghana could yield a positive return. Profitability of the business is dependent on the size of the operations and the number of bicycles that are able to be sold in the market.

Key assumptions

Key assumptions that drive revenue projections in the financial model were based on input received from industry sources and include: • Bicycle builders employed (20 in base case; variable in demand sensitivity analysis) • Bicycles produced per year (20,000 in base case; variable in demand sensitivity analysis) • Percentage of bicycles produced that are sold (100 percent) • Average price per bicycle ($50) • Tax rate on businesses located outside of Kumasi city limits (zero percent) • Growth rate (zero percent) • Discount rate (12.5 percent)

Sources suggested using a 12.5 percent discount rate because it is the average assumptions for the bamboo bicycles discount rate for foreign direct investments in Ghana (Ghana Country Report analysis are obtained from interviews 2008, p. 15). Since the bamboo bicycles venture is a new market entry, the with industry participants and analysis appropriate discount rate for this venture may actually be above the average of data in industry reports (Industry discount rate for foreign direct investments in Ghana. Revenue, cost, and financial participant interview 2008).

Assumptions – Bamboo bicycles

Note: (a) Cost assumptions are based on a production rate of 20,000 bicycles per year. Sources: (1) Industry participant interviews 2008; (2) Ibid; (3) Ibid; (4) Ghana Country Report 2008, pp. 14–15. Bamboo Bicycles in Kumasi, Ghana 19

Financial case study – Base case

According to the base-case illustration, the bamboo bicycles venture in Kumasi, Ghana could be an attractive investment opportunity for an investor. The base-case financial analysis could result in a net present value of approximately $49,000, a payback period of roughly four years, and an internal rate of return of approximately 28 percent.

Expected cash flow for a five-year period Revenue – Number of bikes = 18,333 Assuming only bikes made during 11 months out of the first year are sellable due to ramp-up time.

Operational costs – Overhead Includes direct and indirect overhead.

Expected cash flow over a five-year period shows flat rate revenue after the second year

Sources: (1) Industry participant interviews 2008; (2) Ghana Country Report 2008, pp. 14–15. 20 Bamboo Bicycles in Kumasi, Ghana

Demand sensitivity analysis

According to the demand sensitivity analysis, the bamboo bicycles venture appears to be a scalable business; the rise in net present value increases as the size of the business increases.

Current bamboo bicycles market – Demand sensitivity analysis

The demand sensitivity for bamboo 20 percent penetration of the 50 percent penetration of the bicycles is affected by the adoption rates current market current market for addressable customers who currently If bamboo bicycles penetrated If bamboo bicycles penetrated own bicycles. A key definition in the 20 percent of the current rural bicycle 50 percent of the current rural bicycle demand sensitivity analysis is that the market in Ghana (i.e., if 20 percent of market in Ghana, the result would be “current market” is comprised of the the 227,240 bicycles currently sold to a net present value of $1,505,833, a 227,240 rural Ghanaians who currently rural Ghanaians per year were bamboo payback period of fewer than two years, own bicycles. The demand sensitivity bicycles), the result would be a net and an internal rate of return of 171 analysis for the current bamboo bicycles present value of $484,620, a payback percent. At 50 percent penetration of market includes the assumption that period of fewer than two years, and an the current market, 139 bicycle builders none of the currently untapped potential internal rate of return of 101 percent. would be employed, and 138,620 rural bicycle market would be captured. At 20 percent penetration of the current bicycles would be produced per year. market, 55 bicycle builders would be employed, and 55,448 bicycles would be produced per year.

20 percent penetration of the current market

50 percent penetration of the current market Bamboo Bicycles in Kumasi, Ghana 21

Current and potential bamboo bicycles market – Demand sensitivity analysis

The demand sensitivity for bamboo 20 percent penetration of the total 50 percent penetration of the total bicycles is affected by the adoption addressable market addressable market rates for the total addressable market. If bamboo bicycles penetrated If bamboo bicycles penetrated A key definition in the demand 20 percent of the total addressable bicycle 50 percent of the total addressable sensitivity analysis is that the “total market in Ghana (i.e., if 20 percent of the bicycle market in Ghana, the result addressable market” is comprised of the 670,000 Ghanaians in the addressable would be a net present value of 670,000 Ghanaians in the addressable market for bamboo bicycles purchased $3,896,587, a payback period of fewer market for bamboo bicycles. Some of bamboo bicycles), the result would be a than two years, and an internal rate of these potential customers currently own net present value of $1,444,255, a return of 227 percent. At 50 percent bicycles, and some of them do not; all payback period of fewer than two years, penetration of the total addressable of them are included in the analysis. and an internal rate of return of 171 market, 333 bicycle builders would be percent. At 20 percent penetration of the employed, and 333,333 bicycles would total addressable market, 133 bicycle be produced per year. builders would be employed, and 133,333 bicycles would be produced per year.

20 percent penetration of the total addressable market

50 percent penetration of the total addressable market 22 Bamboo Bicycles in Kumasi, Ghana

Ease of execution

While there are various factors that could affect the success of the production, distribution, and adoption of bamboo bicycles in Ghana, there are measures that can be taken to mitigate those risks.

Demand

Current condition Potential risks Finally, there also exists the potential An accurate depiction of the demand for Demand could be less than the for exportation. Ghana is the only bamboo bicycles is difficult to ascertain demand for metal bicycles indicates country in the region that does not due to their novelty and uniqueness. owing to the fact that it is difficult to impose tariffs on completed bicycles However, there appear to be no cultural accurately estimate the demand for imported from China and India impediments to the adoption of bamboo bamboo bicycles. It is also difficult (Industry participant interview 2008). bicycles by rural Ghanaians, and indeed to project demand as commercial Consequently, approximately 300,000 the few bamboo bicycles that were production of bamboo bicycles has bicycles per year are imported into shown to and used by rural Ghanaians not yet occurred. Ghana to be immediately transported have received positive feedback (Industry to neighboring countries (Industry participant interview 2008). Potential solutions participant interview 2008). This Before launching the full-scale operation indicates that there is a significant Demand for bicycles in Kumasi itself envisioned herein, it might be advisable demand for bicycles in these countries, appears to be limited (Industry participant to undertake a trial run with production and that the infrastructure to distribute interview 2008). The rural residents on a much smaller scale. Additionally, bicycles from Ghana to surrounding of the areas surrounding Kumasi do the initial concentration of distribution countries exists. While a detailed not appear to be the nation’s highest in Tamale and the surrounding regions analysis of export potential from a consumers of bicycles (Industry might lead to higher initial demand regional, as well as Western and participant interview 2008). The city of and a more accurate understanding of Asian, perspective is beyond the scope Tamale, in northern Ghana, and northern the market’s potential. These actions, of this study, export does present a Ghana in general, appear to be the combined with marketing efforts, may possible opportunity that could further highest consumers of bicycles (Industry help mitigate the risk posed by an hedge against disappointing demand participant interview 2008). unexpected shortfall in demand. in Ghana. Bamboo Bicycles in Kumasi, Ghana 23

Bamboo

Current condition recently formed BARADEP to develop an the inability to secure a reliable and There is currently a plentiful supply of industry around this natural resource and consistent supply of the requisite quality native bamboo growing wild in Ghana, to protect the country’s dwindling forests bamboo. An additional risk is an increase with the Ashanti region being a major (Industry participant interview 2008). One in the price of bamboo due to growing growing area (Industry participant step BARADEP has taken relevant to demand and further intervention by the interview 2008; Akuamoa-Boateng 2008, the production of bamboo bicycles was Government of Ghana. pp. 1–2). However, bamboo is not the introduction of legislation to set a currently cultivated in Ghana (Industry minimum price for bamboo destined Potential solutions participant interview 2008). Indeed, it has for use in commercial activity (Industry By collaborating closely with owners of generally been used by the local population participant interview 2008). the bamboo producing land, or by as housing material, and increasingly for vertically integrating the bamboo commercial construction and decorative Potential risks cultivation process into the supply chain, arts (Industry participant interview 2008). With no existing bamboo industry, the the venture could mitigate the risks posed However, the Ghanaian Government principal bamboo related risk may be to the supply of bamboo and its price.

Imported supplies

Current condition purchased in the United States and Potential solutions Manufactured components can be shipped to Ghana (Industry participant In order to ensure the quality of the imported from China in containers interview 2008). bicycles, some of the imported that hold enough parts to make approxi- components could be designated mately 600 bicycles (Industry participant Potential risks specifically for use as spare parts, or interview 2008). The epoxy resin can Spare parts for bicycles in Ghana are alternatively, separate additional spare be sourced and shipped from South often of low quality (Industry participant part kits could be imported. Local Africa in an amount sufficient to meet interview 2008). This poses a danger to repairmen could then be supplied with the production (Industry participant interview the reputation for quality that bamboo parts and instructed that they only use 2008). The tools and jigs can be bicycles hope to develop. these parts to repair bamboo bicycles. 24 Bamboo Bicycles in Kumasi, Ghana

Labor

Labor will likely pose no risks to interview 2008). There is also a large steady employment at the relatively high execution. There is significant contingent of bicycle repairmen, wage of $2.25/hour over their current unemployment and underemployment in woodworkers, and craftsmen with occupations (Industry participant and around Kumasi (Industry participant transferable skills and a preference for interview 2008).

Assembly plant

Current condition Potential risks liability for lost wages as well as for Leasing is affordable (approximately Equipment, materials for much of the pain and suffering (Industry participant $10/m2/year) and, given a 60 percent year, works in progress, and a certain interview 2008). vacancy rate, readily available (Industry number of completed but unsold bicycles participant interview 2008; Snapshot will be stored on-site, presenting a Potential solutions Africa 2007). A plant size of approximately significant risk of loss from fire or theft. Insurance is available in Ghana to cover 740 m2 should be sufficient to fit ten Workers also face the risk of injury, a fire, theft, and injury. The annual cost to work stations, an office for the manager, potentially significant risk considering insure this venture against these risks and areas for drying and storage (Industry the heavy use of power tools. Injuries would be approximately $4,500 (Industry participant interview 2008). could result in potentially employer participant interview 2008).

Materials delivery

Current condition Potential risks participant interview 2008). There Transporting the required manufacturing There have been reports of instances of were also reports that during the wet inputs from China, South Africa, the corruption in customs processing and a season, some of the roads in rural United States, and the fields around lack of reliability in the timing of imported areas may become difficult to pass Kumasi should not pose a significant supplies from China (Industry participant (Industry participant interview 2008). problem. There are major ports in interview 2008). Rising fuel and related Accra and Tema, and there is a reliable transportation costs may increase the Potential solutions road link between Accra and Kumasi cost of materials needed to produce To hedge against delivery risks, (Industry participant interview 2008). bicycles. (Industry participant interview shipments from China could be Bamboo can be placed on trucks at 2008). Additionally, importing these stacked to account for expected pickup points in rural areas and then materials may expose the investor to risk delays, and bamboo could be delivered to Kumasi (Industry participant associated with potential fluctuations in purchased during the dry season to interview 2008). foreign exchange rates. (Industry the greatest extent possible. Bamboo Bicycles in Kumasi, Ghana 25

Distribution

Current condition end user approximately ten percent more consumers through the venture’s Bicycles are currently distributed to end than they bought it for (Industry participant own distribution network. A distribution users in Ghana through a network of interview 2008). Accordingly, the network could be created by hiring independent bike dealers (IBDs) expected cost of a bamboo bicycle to the existing IBDs that currently serve (Industry participant interview 2008). consumer would be approximately $55. the target segment as exclusive IBDs purchase bicycles from the distributors of bamboo bicycles. importers or larger IBDs in their areas Potential risks Also, sales could be made directly to and then resell the bicycles to the end The operation is heavily reliant on IBDs as companies operating in Ghana for use user (Industry participant interview its sole purchaser and distribution channel. by their employees, and to the 2008). Rural IBDs often buy a bicycle for Also, due to the lack of direct consumer Ghanaian Government. resale only when they have an order contact, feedback on the bicycles from the placed by a customer (Industry end user will be slow and unreliable. Regular customer visits performed participant interview 2008). by the manager and foreman would Potential solutions also help ensure better feedback, and While there is no standard markup used In order to mitigate these risks, the would be especially useful in the initial by the IBDs, they generally charge the bicycles could be sold directly to end project phases.

Electricity

Current condition Potential risks Potential solutions Ghana is reliant on hydroelectric dams Under current conditions, blackouts and In order to hedge against temporary loss for 70 percent of its electricity (EIU 2007, brownouts can be expected for up to of power, a diesel generator could be p.24). The electricity supply is currently five days every month (Industry purchased. A generator large enough considered to be relatively dependable, participant interview 2008). Furthermore, to handle production needs could be but as recently as 2007, there was a drought severe enough to hamper purchased new in the United States power rationing caused by the grid’s Ghana’s hydroelectric supply or the for approximately $3,000–$6,000. inability to handle increasing demand failure of supply to keep up with demand, Furthermore, any scheduled brownouts and urbanization (Industry participant could lead to further shortages and could be worked around since much of interview 2008). production interruptions. the assembly is done by hand.

Taxes and incentives

Current condition of revenue for the transfer of Potential solutions Income tax is levied at a rate of ten technology to a local business (Board The business should be located just percent on businesses located in of the Ghana Investments Center beyond the city limits in order to minimize Kumasi (Industry participant interview 1992, pp. 5–6). its tax liability. The technology embodied 2008; GIPC (accessed 2008)). in the bamboo bicycle appears likely to However, income is not taxed if a Potential risks qualify under the technology transfer law, business is located just outside of By being located in Kumasi, profits but transfer of the technology to a wholly Kumasi’s city limits. will be taxed at ten percent. It also owned foreign entity may not. Therefore, appears that incentive fees are only to benefit from the incentive fees, the The government provides incentive paid when technology is transferred technology could be transferred to a local fees at a rate of two to eight percent to a Ghanaian entity. joint venture partner. 26 Bamboo Bicycles in Kumasi, Ghana

Social impact

Social beneﬁ ts

Bamboo bicycles appear to have the potential to make a significant positive impact on the social and economic welfare of Ghana.

Job creation The venture may not only create employment for assemblers at a higher wage than most other Ghanaians, it may also create jobs and income along the value chain for the suppliers of bamboo and the distributors of the bicycles. It may also assist in the Ghanaian Government’s efforts to develop the bamboo industry.

Increased productivity and efficiency The end users of the bicycles, rural Ghanaians employed mostly within the agricultural sector, may increase their productivity and efficiency. Rural inhabitants may be able to transport more goods over longer distances and in a shorter time. The decrease in travel times may also allow for more time to be spent working the fields and selling produce.

Healthcare delivery It appears the delivery of rural health services is currently limited in Ghana (Industry participant interview 2008). However, because bamboo bicycles are light and can handle rough terrain while carrying large loads, they can be used in emergency and nonemergency situations for the transport of medical professionals, medical supplies, and patients. Indeed, case studies in Tanzania have shown that investing in bicycles for healthcare delivery may be a cost-effective way of lowering mortality rates (Gauthier 2005, pp. 23–25).

Environmental benefits The increased cultivation and use of bamboo as an alternative to traditional wood could help the preservation and rehabilitation of Ghana’s dwindling forests (Industry participant interview 2008).

Education transit Parents in rural areas often take their children to school on bicycles. By increasing bicycle use and availability in rural areas, school attendance by rural children could increase (Industry participant interview 2008). Bamboo Bicycles in Kumasi, Ghana 27

Conclusion

The production and sale of bamboo bicycles in Ghana could be a financially viable, scalable, and socially responsible venture. The potential annual market for bicycles in rural Ghana and the gap left open by the insufficiencies of imported metal bicycles may present a promising opportunity. Additionally, according to sources, the cost of producing the bicycles could allow for a profit margin of approximately six percent on each bicycle sold, and perhaps more importantly, the expected final cost to the end consumer of approximately $55 puts the bicycle within reach of many rural Ghanaians.

There are risks related to the production and scalability of the enterprise, although an investor may be able to mitigate some of these to a degree. The investor and reader should be aware that the actual demand for these bicycles is not known and cannot be accurately estimated with a high degree of certainty. Customer perception of the bicycles could be a significant impediment to an investor’s success in the market. Starting with a small-scale operation in northern Ghana might be advisable in order to more precisely ascertain demand levels and the appropriate scale and production capacity of the operation. 28 Bamboo Bicycles in Kumasi, Ghana

References

Akuamoa-Boateng, Abenaa (2008). “Report on the Preliminary Assessment of the Bamboo Sector/Industry in Kumasi,” Millennium Cities Initiative.

Board of the Ghana Investments Center, “Technology Transfer Regulations, 1992.”

Dorsey, Bryan (accessed July 2008). “Sustainable Intermediate Transport in Western African Secondary Cities” (Ogden, UT: Weber State University).

Economist Intelligence Unit (2007). Country Profile 2007 – Ghana.

Economist Intelligence Unit (2008). Ghana Country Report.

Gauthier, Aimée (2005). “More Than Just Roads and Trucks: Scaling Up for Healthcare Mobility in Africa,” Institute for Transport & Development Policy: Sustainable Transport, Number 17.

Gauthier, Aimée and Walter Hook (2005). “Tapping the Market for Quality Bicycles in Africa,” Sustainable Transport, Number 17 (New York, NY: Institute for Transport and Development Policy).

Ghana Investment Promotion Center (accessed July 2008). “Cost of Doing Business in Ghana,” http://www.gipc.org.gh/faq_content.aspx?id=12.

Ghana Ministry of Local Government, Rural Development and Environment (accessed July 2008). Ghana Districts, http://www.ghanadistricts.com/ districts/?r=2&_=6&sa=5512.

Ho, David (2007-2008). “New Project Proposal,” “Progress Report #1,” “Progress Report #2,” “Progress Report #3,” Bamboo Bicycles as Sustainable Transportation in Africa: A Feasibility Study (Columbia University: The Earth Institute).

Industry participant interviews 2008.

International Monetary Fund (2008). World Economic Outlook Database; Ghana Ministry of Local Government, Rural Development and Environment (accessed July 2008).

Litman, Todd and David Burwell (2006). “Issues in Sustainable Transportation,” International Journal of Global Environmental Issues, Volume 6, Number 4.

Mozer, David (1989). “Transportation, Bicycles and Development in Africa: Progression or Regression” (Seattle, WA: International Bicycle Fund).

United Nations (2008). “Urban Population, Development, and the Environment 2007” (United Nations: Department of Economic and Social Affairs, Population Division).

World Bank Group (2007): “Snapshot Africa – Ghana: Benchmarking FDI Competitiveness,” http://www.fdi.net/documents/WorldBank/databases/snapshot_ africa/docs/snapshot_africa_ghana.pdf. We would like to thank the following KPMG summer interns for their role in the preparation of this report: Kristin Meyer, Harvard Business School; Andrew Taylor, University of Michigan Business School; and Shilpa Santosh, University of Michigan. us.kpmg.com

For more information, please contact:

Chris Gottlieb Principal, Transaction Services +212-872-6794 [email protected]

Jim Geisel Senior Manager, Advisory +704-371-8104 [email protected]

MCI AND VCC WORKING PAPER SERIES ON INVESTMENT IN THE MILLENNIUM CITIES

No 03/2008

ASSESSING INFRASTRUCTURE CONSTRAINTS ON BUSINESS ACTIVITY IN KUMASI, GHANA

Ginger Baker

SEPTEMBER 2008

432 South Park Avenue, 13th Floor, New York, NY10016, United States Phone: +1-646-884-7422; Fax: +1-212-548-5720 Websites: www.earth.columbia.edu/mci; www.vcc.columbia.edu

MCI and VCC Working Paper Series No 03/2008

As part of this effort, MCI helps the Cities to create employment, stimulate enterprise development and foster economic growth, especially by stimulating domestic and foreign investment, to eradicate

A separate MCI working papers series on the social sector will be available.

For more information, please refer to the MCI website at: http://www.earth.columbia.edu/mci/ and the Vale Columbia Center website at: http://www.vcc.columbia.edu/.

TABLE OF CONTENTS EXECUTIVE SUMMARY...... 4 1. PURPOSE...... 6 2. METHODOLOGY ...... 8 2.1. LIMITS TO RESEARCH...... 8 2.2. INTERVIEW SCHEDULE ...... 10 3. RESULTS...... 11 3.1. ELECTRICITY ...... 11 3.2. ENERGY/LIQUID FUELS ...... 14 3.3. WATER ...... 16 3.4. WASTE DISPOSAL...... 18 3.5. TELECOMMUNICATIONS ...... 20 3.6. TRANSPORTATION ...... 22 3.6.a. Ground Transportation ...... 22 3.6.b. Air Transportation...... 24 3.6.c. Port Access...... 25 3.7. LAND...... 25 3.8. SECURITY...... 26 4. OPPORTUNITIES FOR INFRASTRUCTURE INVESTMENT ...... 27 4.1. RENEWABLE ENERGY...... 27 4.2. ROAD & RAILWAY PRIVATIZATION...... 28 4.3. RECYCLING/SCRAP DEALERS ...... 29 5. CONCLUSION...... 30 6. APPENDIX ...... 31 6.1. INFRASTRUCTURE SURVEY ...... 31 6.2. REFERENCES...... 35

Assessing Infrastructure Constraints on Business Activity in Kumasi, Ghana

Ginger Baker*

EXECUTIVE SUMMARY

The development of urban infrastructure is intimately connected with the process of economic growth. Businesses depend on reliable water and electricity sources, affordable and plentiful land for expansion and modern transportation networks to reach the markets they serve. Inadequate infrastructure can deter investments and lead to a general climate of economic decline.

In the city of Kumasi, Ghana’s second largest city, the growing economy and surge in population are placing stress on the infrastructure systems. In 2006, the population of Kumasi grew at 5.5% - almost twice the national average. 1 This rate of growth presents both challenges and opportunities to businesses and economic growth in Kumasi and the Ashanti region.

The primary infrastructure constraint for 43% of the entities interviewed was inconsistent electricity supply and energy costs. This study found that the primary concerns are the erratic supply of electricity, frequent voltage fluctuations, and the high cost of alternative sources of energy. Currently, businesses in Kumasi are experiencing, on average, five power outages a month, lasting approximately three hours each. Although the consistency of the electricity supply and the length of disruptions have improved, companies are still hindered by the uncertainty over power outrages. It is common for businesses to take precautions to protect machinery from surges. These actions, coupled with the increased cost of maintaining diesel generators and the loss of production during power outages, place an undue burden on business activity in Kumasi.

Ground transportation was the second most cited constraint with nine of the businesses ranking roads as the most disruptive element of doing business in Kumasi. Road concerns were focused on congestion in the city center (6 out of 9 respondents) and road conditions outside of town that substantially increased the cost of doing business in terms of time, vehicle repairs, inaccessible clients and raw materials, and additional costs of labor due to overtime (3/9).

Water quality and supply were commonly listed as “secondary constraints” but were only considered the most disruptive component of infrastructure in 7% of the interviews. Other areas of concern were related to Information, Communication and Technology (ICT) costs and the proximity of new land for expansion to the existing business site or the complexity of the land acquisition process.

* The author can be reached at [email protected]: The author would like to thank The Earth Institute at Columbia University and the Millennium Cities Initiative; Umesh Menon; Suame Magazine Industrial Development Organization; Kingsley Twumasi; Ghana Investment Promotion Centre; Kwaku Appiah-Menka II; Jacob Winiecki; the Association of Ghanaian Industries; and especially Abenaa Akuamoa-Boateng for her kindness and inspiration. 1 Kumasi Metropolitan Authority (2007). A Brief Guide to Kumasi, p. 5.

Box 1 - Infrastructure Constraints on Businesses in Kumasi, Ghana

Primary  Inconsistent electricity supply

Secondary  Road congestion (in city center)

Tertiary  Poor road conditions (primarily on the outskirts of Kumasi)  High costs of backup electricity and other energy options  Lengthy process for land acquisition and location of available land

Even in the face of these obstacles, the business climate in Kumasi is optimistic. The businesses interviewed understood the causes of these constraints (growing population, outdated water pipes, decreased rainfall for hydropower) and were fair in their assessments regarding the challenges relating to infrastructure in Kumasi. The recent improvement in the electricity supply has generated hope that expansion projects underway, in both hydropower and Liquefied Petroleum Gas (LPG), will continue to improve the situation in Kumasi. Additionally, evidence of road maintenance and the possibility of developing new railways and an international airport will provide relief to many businesses.

In other areas, Kumasi offers opportunities for investors. The cost and availability of land, a secure work environment, the relatively advanced stage of ICT development compared to other African countries2 and the underdeveloped waste management and alternative energy sectors offer opportunities for doing business in Kumasi. It is possible to capitalize on the existing infrastructure in Kumasi while providing solutions to the current constraints. Participants in this study observed opportunities for investment and growth in Kumasi that could provide both profitable enterprise activities and improvements to the local environment for commercial entities. Some specific opportunities for investment (and the constraint they help address) are outlined in Box 2.

Box 2 - Investments and Constraints

Investment Opportunity Constraint Addressed

Railway network rejuvenation Road congestion, ground transportation

Renewable energy sector Energy availability & cost, waste collection

Private roads Road condition & road congestion

Formal recycling/scrap business Waste collection

2 Gillwald, Alison and Stork, Christoph (2006). “Towards an African e-Index: ICT Access and Usage Across 16 African Countries,” ICT Sector Performance Review, http://www.researchictafrica.net/images/upload/Cairo.pdf, p. 11.

1. PURPOSE

The primary objective of this study is to assess current infrastructure in the metropolitan region of Kumasi and to understand better how that infrastructure either helps or hinders commercial activities. The secondary goal of this analysis is to identify key areas of opportunities for infrastructure investment that could enable existing and emerging businesses to thrive.

For the purposes of this study, the definition of infrastructure will include: electricity, alternate energy sources, water, telecommunications, waste, ground and air transportation, land, and security.

Located 270km north of Accra, Kumasi is the capital of the central Ashanti region and one of Ghana’s most important cultural cities. Most major roads from the Ivory Coast, Togo and Burkina Faso connect in Kumasi – either directly or via Tamale, Ghana’s third largest city located in the Northern Region. With a population of 1.6m, Kumasi accounts for 33% of the Ashanti region’s population and is projected to reach 1.9m by 2009.3 Teak harvesting, breweries and agro- processing dominate the economy of this Millennium City, and the city is teeming with new business ideas and capable entrepreneurs. Kumasi boasts a bustling downtown and marketplace; however, the infrastructure of the city requires upgrading before it can reach its full potential.

As the upgrading and rejuvenation begins, it is imperative to prioritize the development of public works in order of importance to the citizens and businesses residing in the area. A key component of this study is that it includes the perspectives of a variety of businesses that vary in industry, size and potential for growth. These entities have a first-hand understanding of the nuances of business development in Kumasi.

Additionally, this research uncovered creative coping mechanisms used by businesses to deal with infrastructure challenges. These coping mechanisms, often adopted out of necessity, are largely the basis for the recommended investment opportunities – turning simple solutions into profitable business concepts.

3 Kumasi Metropolitan Authority (2007). A Brief Guide to Kumasi, p. 5.

Map 1 - Ghana

Source: Baden-Powell, R.S.S. (2007). “The Downfall of Prempeh: A Diary of Life with the Native Levy in Ashanti 1895-6,” http://www.pinetreeweb.com/bp-prempeh-large-map.htm.

2. METHODOLOGY

Data for this analysis were obtained through a series of interviews and site visits with the directors, general managers, engineers or owners of 28 businesses located in Kumasi. This analysis also includes information collected during meetings with officials from the Ghana Water Authority (GWA), the Electrical Company of Ghana (ECG) and the MCI staff working in Kumasi. All interviews were conducted during the period of January 3, 2008 – January 23, 2008.

Care was taken to obtain perspectives from businesses of varying sizes and industries. For this purpose, there is approximately an equal number of smaller businesses (< 30 employees), medium-sized businesses (30 – 75 employees), and larger businesses (> 75 employees) included in the study.4 The industries represented in the interview schedule below were chosen because they were considered high-potential industries by the MCI staff, the Kumasi Metropolitan Authority (KMA) or KPMG, which has partnered with the MCI in a number of Millennium Cities, or because these industries are currently concentrated in Kumasi or have been in the past. The breakdown of industry representation includes: agriculture/agro-processing (6), metals & construction (4), pharmaceuticals (3), printing (3), wood/timber (3), tourism (2), beverages (2), garment/textiles (2), general manufacturing (2), and leather working (1).

The interviews were facilitated through local MCI staff with the support of the Association of Ghanaian Industries (AGI) and the Ghana Investment Promotion Center (GIPC). Many of the interviews were conducted in conjunction with Umesh Menon, a consultant from the United Nations Industrial Development Organization (UNIDO), who was in Kumasi interviewing businesses of similar demographics.

These interviews were supplemented by newspaper articles, statistics and background literature about Kumasi and Ghana’s development in general. These sources are noted throughout the text and are included in the List of Sources section of the Appendix.

2.1. Limits to Research

The biggest constraint on the research conducted was a lack of clear data from the businesses on the amount of water, fuel and electricity they required to run their businesses. In 60% of the interviews, a portion of the total consumption information was based on estimates taken from monthly bills for these services. The researcher then used the tariff structure provided by the ECG5, GWA6 and prices of fuel listed at filling stations to calculate monthly demand for the companies. Therefore, since price discounts for bulk purchasing of water and electricity were not revealed, they are not factored into the infrastructure expenses. Additionally, human error in reporting needs to be considered as some business owners used estimates instead of actual data.

4 Categorization of business sizes was done by the researcher and is not an official means of identification. 5 For tariff structure, see Table 2 on page 12. 6 For tariff structure, see Box 3 on page 17.

Given the limited access and availability of statistics on costs and infrastructure use, a thorough analysis of the market demand was inapplicable.

The small sample size is an additional limit of the research. In total, 31 businesses were interviewed for the purposes of this study, but data from three of the interviews will not be analyzed as part of this report because the entity was either too small (fewer than five employees) or the managers interviewed were unable (or unwilling) to answer the majority of the quantitative questions.

Additional constraints included the limited time in which the study was conducted (a 20-day period in January 2008). While this was sufficient time to conduct the interviews, it was not enough time to build relationships with the businesses ensuring comfortable and honest reporting of their infrastructure constraints.

2.2. Interview Schedule Table 1– Interview Schedule

Date Sector Products/Services Employees 3-Jan Metals and construction Cement blocks 15 4-Jan Wood and timber Electric poles and lumber 180 7-Jan Garment and textiles Uniforms and clothing 40 7-Jan Metals and construction Cement blocks 60 7-Jan Metals and construction Furniture 25 8-Jan Leather Shoes and hand bags 10 9-Jan Agro-processing Poultry and livestock feed 62 9-Jan Agro-processing Fruit juices 5 10-Jan Garment and textiles Kente cloth 46 10-Jan Printing Textbooks 30 10-Jan Printing Books and toiletries 20 11-Jan Agriculture Poultry and citrus farm 150 11-Jan Agro-processing Nut and vegetable oil 95 11-Jan Wood and timber Wood carvings and crafts 50 13-Jan Agriculture Teak, cassava and papaya 100 14-Jan Metals and construction Construction 25 14-Jan Pharmaceutical Herbal medicine 35 14-Jan Manufacturing Laundry soap 15 14-Jan Wood and timber Furniture and joinery 52 15-Jan Electrical Co. of Ghana n/a n/a 15-Jan Ghana Water Authority n/a n/a 15-Jan Manufacturing Toilet paper and disposable wares 211 16-Jan Printing General printing 46 17-Jan Agro-processing Soap and palm oil 80 19-Jan Tourism Hotel and restaurant 50 21-Jan Beverage Soda production and bottling 2507 21-Jan Pharmaceutical Pharmaceuticals and detergents 120 21-Jan Tourism Hotel and conferencing 36 22-Jan Beverage Brewery 7008 23-Jan Pharmaceutical Pharmaceuticals 60

7 Best estimate available. 8 Best estimate available.

3. RESULTS

Energy-related problems were the primary infrastructure constraint of 43% of entities interviewed. This study found that these concerns were centered on erratic electricity supply and fluctuations (9/28) and expensive backup sources of energy (3/28). Road-related concerns were the second most cited constraint with 32% of businesses ranking roads as the most disruptive element of doing business in Kumasi. Primary road concerns include congestion in the city center (6/28) and road conditions outside of town (3/28). These issues substantially increased the cost of doing business as measured by time, vehicle repairs, inaccessible clients, and raw materials and additional costs of labor due to overtime. Water quality and supply were also commonly mentioned as “secondary constraints,” but were only considered the most disruptive element in 7% of the interviews (2/28). Other areas of concern were related to ICT costs, the unfavorable location of land available for business expansion and the complex process for acquiring that land.

Chart 1 – Most Disruptive Infrastructure Constraint on Businesses in Kumasi

3 2

ICT Land 6 2 Water Land/fuel cost Electricity fluctuations Electricity supply 3 Road congestion Road condition

3.1. Electricity

Supply Electricity is an area of frustration for many of the businesses interviewed in Kumasi. The KMA reports there are five bulk supply points servicing Kumasi with 231km of overhead lines and 140.6km of underground cables. 9 The current sources of electricity are hydropower via a

9 Kumasi Metropolitan Authority (2007). A Brief Guide to Kumasi.

generation plant at Acosumbo and a thermal power plant in Tema, both purchased from the Volta River Authority (VRA).10

Kumasi experienced an energy crisis during the fall of 2007 due to decreased water levels at the Akosombo reservoir during the dry season.11 While the situation has improved drastically since the beginning of 2008, electricity disruptions and fluctuations are a persistent problem facing businesses in Kumasi. The research showed that businesses experience an average of 5.1 supply disruptions each month that last an average of 3.1 hours, or close to 16 hours each month. However, the lost productivity goes well beyond those 16 hours as many companies run their backup generators for additional hours to avoid potentially detrimental electrical fluctuations.

Cost The table below shows the tariff structure published by the Electrical Company of Ghana in November 2007. Of the 28 businesses interviewed, two home-based businesses paid domestic rates for electricity, and 21 reported paying the non-residential or “commercial” rates.12

Table 2 – Public Approved Electrical Tariff Structure (as of November 1, 2007)

Tariff Category + Units Current Rates (GH¢) Previous Rates (GH¢) Non-Residential 1 – 300 0.14 0.102 301 – 600 0.17 0.14 600 + 0.195 0.125 Service Charge (/Month) 2.5 Residential 1 – 50 0.095 unavailable 1 – 300 0.12 301 – 600 0.16 600 + 0.19 Service Charge (/Month) 0.5 Source: Electrical Company of Ghana (ECG)

The average amount paid to the Electrical Company of Ghana (ECG) per business is GH¢539 per month for all 28 businesses.13 A small-sized cement block manufacturer uses slightly less than 100kWh per month with an average bill of around GH¢22. During long outages the business owner rents a generator in lieu of owning one. A mid-sized printing company uses approximately 2,340kWh and pays GH¢325 per month to the ECG and uses a 43.3KV Diesel Generator to power the facilities during outages. A large bottling facility uses more than 250,000kWh per month and has a fuel expenditure of GH¢875 for the backup diesel generator.

10 Electrical Company of Ghana, 2008. 11 Ibid. 12 The additional five businesses were either unsure of their rate or chose not to answer the question – this includes the two largest businesses. 13 This figure does not include the average paid by the two largest businesses, which did not respond to this question.

While no company indicated paying the special rate structure offered by the ECG (listed as SLT- LV, SLT-MV and SLT-HV below), the chart is included for reference purposes.

Table 3 – Special Electrical Tariffs, 2007

Tariff Category + Units Rates (in GH¢) SLT-Low Voltage Capacity Charge (kVA/Month) 1.00 Energy Charge (/kWh) 0.16 Service Charge (/Month) 7.50 STL-Medium Voltage Capacity Charge (kVA/Month) 9.00 Energy Charge (/kWh) 0.09 Service Charge (/Month) 12.50 STL-High Voltage Capacity Charge (kVA/Month) 9.00 Energy Charge (/kWh) 0.09 Service Charge (/Month) 12.50 Source: Electrical Company of Ghana (ECG)

Coping Mechanisms When disruptions occurred, 19 of the 28 entities relied on diesel-powered generators for full or partial generation. Twenty-five percent (7/28) of the businesses were forced to stop working during the power outages due to an absence of backup options. The leather company interviewed had difficulty with employee retention because of the lost earning potential for employees during these interruptions. Another business owner obtained two separate connections to ECG. During times of electrical failure, the company transitions to the line with the strongest and most consistent current – a creative and cost-effective coping mechanism.

Chart 2 – Methods of Coping with Electricity Supply Disruptions

Not on grid

Partial generator

Generator

Stop working

Coping Mechanism Coping Use alternate line

02468101214

Number of Respondents

Recent Improvements The electricity supply has seen drastic improvement since December 2007, with one company stating that, at their particular location, the number of disruptions had decreased from fifteen per month to, on average, less than four. Another business stated that their costs of backup diesel had dropped substantially with the improvement of the electricity supply.14 The length of each disruption had also decreased for many companies recently. One entity said that, on average, the disruptions have dropped from 12 hours to 1.5 hours.

3.2. Energy/Liquid Fuels

Cost The 19 companies using generators for complete or partial coverage during electrical outages spent on average GH¢ 639 per month on diesel fuel for replacement electricity. That represents an average of 13% of electricity costs spent on generator fuel each month for these 19 companies. Given the relatively small sample size, it is important to note that one outlier could skew these statistics. However, the researcher did obtain qualitative information about the price burden and need for backup fuel and estimated that most companies with generators were spending about 10% of total electricity costs on diesel fuel.

Other fuels used by commercial entities in Kumasi include: liquefied petroleum gas (LPG), diesel and gasoline for vehicles, and industrial lubricants and oils for machinery. During January 2008, the cost of LPG was reported as GH¢ 15.4 for a 14kg cylinder. Another company reported paying GH¢7 for a 7kg cylinder. During the same time period, 1 gallon of gasoline cost GH¢ 4.7, and the same quantity of diesel fuel was priced at GH¢ 4.15.

14 In the span of 2 months, this particular business had decreased generator use from 60% of business hours to around 8%.

Supply While diesel and gasoline are readily available in the Kumasi Metropolitan Area, LPG is increasingly difficult for businesses to obtain on a consistent basis due to increasing demand in the Kumasi area. Of the four respondents using LPG on a regular basis, three reported that they encountered difficulties with supply. Finding a reliable and consistent supply of LPG was a significant constraint, particularly for hotels and restaurants.

Coping Although only four entities regularly use LPG, all four keep a backup supply of liquid fuels (both diesel fuel and LPG) on the premises to handle disruptions. This restricts the amount of capital the businesses can utilize in other areas because it is using a disproportionate amount to control unreliable supply. One juice processor uses 60kg of LPG each month and keeps 56kg in reserve at all times to ensure consistent supply. The manager of a 24-room hotel and upscale restaurant uses GH¢600 worth of LPG each month and keeps a “closet full” of LPG in storage on the hotel premises to use when disruptions occur.

Other Energy In addition to diesel fuel and LPG, businesses reported using biomass for energy needs. In particular, wood fuel, charcoal and animal by-products are used for boilers, cooking and steam generation. One innovative farmer uses methane from animal dung on his farm to cook at home.

Example of biomass/wood fuel being used at a vegetable oil plant in Kumasia

aPhoto by Umesh Menon

Near Completion: West African Gas Pipeline (WAGP) An exciting development mentioned by two of the larger businesses interviewed is the completion of the West African Gas Pipeline (WAGP), which runs offshore from Lagos, Nigeria to Effasu, Ghana. The project is expected to supply Ghana with enough Nigerian natural gas to save between 15,000 – 20,000 barrels of crude oil per day. The four primary WAGP partners are ChevronTexaco (36.7%), NNPC (25%), Shell (18%), and the Volta River Authority (16.3%). The main user of the pipeline will be the power plant in Takoradi.15

15 United States Department of Energy (2003). Energy Information Administration: West African Gas Pipeline (WAGP) Project, http://www.eia.doe.gov/cabs/wagp.html.

Map 2 – West African Gas Pipeline

Source: Energy Information Administration, www.eia.doe.gov

3.3. Water

Source: The Ghana Water Authority (GWA) receives its water from two treatment plants near the city – one in Owabi (10km from the city) and one in Barekese (16km from the city).16 A little more than half of the businesses interviewed (15/28) use the water from the GWA as their primary source. The other major source for Kumasi industries is ground water (10/28) coming both from bore holes and wells.

16 Ghana Water Authority, 2008.

Chart 3 – Sources of Water

Informal purchase 4% Bore hole Bore hole Well 21% 14% Combination including GWA Combination GWA including GWA 7% Well

GWA Informal purchase 54%

Supply: The disruption of supply is a bigger problem than the overall results would suggest. Eleven businesses overall do not experience any supply disruption. However, of those eleven businesses only half are GWA customers.17 The users who were solely reliant on GWA experienced an average of 3.2 disruptions per month, each lasting an average of 10.9 hours. The average number of disruptions per month for all of the businesses interviewed was 2.25, and each of those disruptions lasted an average of 22 hours. The long disruptions for the well-water users occurred during the dry season. Two businesses interviewed were consistently without water for an average of four months each year.18

Coping Mechanisms Of the 17 businesses that relied either solely or partially on the Ghana Water Authority (GWA) for water supply, four stated that they did not require a backup source as they did not experience supply interruptions or supply interruptions did not impact business. The most popular forms of GWA backup were storage tanks or reservoirs (5/17). Other coping mechanisms for water supply disruption from GWA included rainwater harvesting, wells, purchasing from tanker trucks (supplied by the GWA) and fetching water from nearby streams. Of the ten commercial entities that utilize ground water (i.e. either bore holes or wells) as their primary water source, four stated that backup sources were not required due to consistent water supply. Tanker trucks were the most popular source of additional supply (3/10) and other entities relied on reservoir/storage tanks or nearby streams.

Cost: Costs associated with bore holes and wells were described to the researcher as a “one-time cost” of drilling. The rate structures for GWA customers can be seen in box 3 below. More than 85%

17 The remaining businesses rely on well water. 18 During the dry season, these two businesses rely on backup water supply from tanker trucks.

of the businesses interviewed were billed as “commercial/industrial” customers. The two largest businesses interviewed, both of which are heavily reliant on water for industrial use, have arrangements with the water company and do not pay the amounts listed.19

Box 3. Ghana Water Authority – Rate Structure

Domestic: 0 – 20 m^3/month GH¢ 0.66 / m^3 21 + m^3/month GH¢ 0.91 / m^3

Commercial/Industrial: Flat Rate GH¢ 1.10 / m^3

Quality: Twelve of the 28 businesses in the study treat their water internally. For the purposes of the study, respondents were asked to rank the water quality as “bad,” “okay” and “good.” The perception of the quality of water in Kumasi varies depending on the source. As demonstrated below, a higher percentage of non-Ghana Water Authority users classify their water as “good” than those that use the GWA as their primary water source.

Chart 4 – Perception of Quality of Water Sources

Ghana Water Authority Ground Water Sources (non-GWA)

Good Good 13% Bad 36% 25%

Bad Bad OK OK Good Bad Good 9%

OK OK 55% 62%

3.4. Waste Disposal

Wastewater The researcher was unable to adequately analyze wastewater treatment services, as the companies interviewed did not use outsourced wastewater treatment. Aside from the two large businesses representing the beverage industry, wastewater treatment was of little concern to the entities interviewed. Of the 28 businesses included in this study, ten use septic or storage tanks, four

19 Details on those contracts are not available.

dump wastewater on the premises, three drain the water to the public sewage system, two have treatment facilities onsite and recycle part of the waste, and nine reported that they either did not have wastewater or had no specific strategy for its handling.

Solid Waste The KMA reports that an estimated 60% of refuse is collected and sent to the landfill site at Oti, while the remaining 40% is dumped in open refuse points or burned by residents and businesses.20 Waste collection is not a constraint for any of the businesses interviewed, but it was viewed as an area that needs improvement for the sake of public health, quality of life and environmental protection.

Eleven respondents (40% of total) outsource their solid waste disposal to government collection (9) or private collection (2). The remaining businesses handle their own solid waste disposal through a variety of methods including dumping at public waste sites (6), incineration (5), onsite landfills (2) and utilizing a combination of disposal methods simultaneously (4).

Chart 5 – Methods for Handling Solid Waste

Combination Dump at public 14% site 21% Dump at public site Incineration Incineration Gov't collection 18% Landfill onsite 33% Landfill onsite Private collection 7% Gov't collection Private collection Combination 7%

Cost Twelve of the 28 businesses interviewed provided cost data for solid waste collection. Eleven of these respondents pay between GH¢8–50 per month for collection. The cost of domestic refuse collection by the municipal government is GH¢30, and the cost of commercial collection is slightly lower at GH¢24.21 Given that many entities interviewed paid more than GH¢24 each

20 Kumasi Metropolitan Authority (2007). A Brief Guide to Kumasi. 21 Data provided by Abenaa Akuamoa-Boateng, January 2008.

month, more research is needed to decipher the formula for determining cost of refuse collection by the private sector.

Recycling More than 50% of the commercial entities surveyed (15 of 28) capitalized on some form of either formal or informal recycling. Examples include: a beverage bottling company that recycles broken glass; a palm oil manufacturer that uses palm waste to power a steam generator; a Kente cloth manufacturer and a shoe maker who both use waste scraps to make jewelry, ties, key chains and hair pieces; printing companies that sell scrap paper; lumber companies that sell wood chips; and a poultry farmer who pipes the methane from animal dung for use as gas.

Box 4 - Emerging Development: Waste–to–Energy Project

Private sector participation is being encouraged in Kumasi’s power sector. A waste-to-energy

plant is being constructed at the KMA landfill site in Ori that will generate between 30 and 52

megawatts of electricity. Kumasi currently generates about 1,000 tons of garbage per day that

will help support the plant’s 1,600 ton per day capacity. This is an excellent opportunity for

private contractors to facilitate the disposal of the estimated 40% of Kumasi’s uncollected

refuse. Construction and sole financing is managed by Cinergex Solutions Limited of Canada.

The company has signed a purchase power agreement with the Electrical Company of Ghana to supplement their current power supply from the Volta River Authority. Construction on the project began in May of 2007 and is expected to be completed in 2009.

Source: Caliph, Mohamed (2008). “Waste to Energy Plant for Kumasi,” The Daily Guide Ghana (March 23, 2008), http://www.dailyguideghana.com/portal/modules/news/article.php?storyid=2260.

3.5. Telecommunications

Main Form of Communication Although it is one of the most important commercial regions in Ghana, in 2005 the Ashanti Region had only 15% of Ghana’s landline telephones compared to more than 60% in the greater Accra region.22 Many of the businesses have access to both landlines and mobile phones, but the majority of users found the mobile service to be more efficient and convenient for business purposes. Seven businesses cited landline availability or quality as a major constraint to their business – often preventing the addition of fax or internet services on the business premises.

Of the 28 businesses interviewed, 15 have fax machines available on site and 14 have access to internal internet connections. Six businesses with internet connections on site use Broadband, four use dial-up on phone lines and three use USB/Mobile ports with a satellite connection.

22 Frempong, Godfred K. (2007). “2007 Ghana Telecommunications Sector Performance Review: a supply side of policy outcomes,” Science and Technology Policy Research Institute, Research ICT Africa, http://www.researchictafrica.net.

Chart 6 – Main Form of Business Communication

Equal use (LL/M) Email 7% 4%

Email Mobile Landline 36% Landline Mobile Equal use (LL/M) 53%

Costs Landline: Trunk and local calls via Ghana Telecom cost GH¢0.14 per minute (as of January 2008). The monthly cost of landline telephone usage generally ranges from GH¢20–35, with the average monthly cost of all landline usage per business costing approximately GH¢58. 23 The most commonly referenced payment plan was one in which businesses could prepay for credits on the landline and use them as necessary. This eliminated paying for unused minutes or services.

Mobile: There are four mobile networks servicing the Kumasi area: Tigo, MTN, OneTouch and Kasapa. The survey participants noted that the cost of a cellular minute had decreased recently to between GH¢0.10 and GH¢0.25 per minute. One pharmaceutical company had a cellular plan charging GH¢0.13 per minute for domestic “in network” calls and GH¢0.18 per minute for calls outside the network. Of the 17 companies reporting cellular data, the average monthly expenditure per business on cellular calls was between GH¢124–126.

Internet: Of the 14 businesses reporting internet access onsite, the quality and consistency of service provided varied greatly by the type of connection utilized. The speed of connection varied between 54-512 kb per second. For dial-up connections, most users reported slow connections with frequent disruptions (>1 disruption per 3 hours) and a cost of ~ GH¢0.6 per hour. Only three of the businesses with internet on site were using the USB satellite receivers for a wireless connection. This service obtained the highest connection speeds and greatest reliability, although the cost was significantly higher at GH¢2.5 per hour of use. The average monthly cost for Broadband service was GH¢85.

Fax: Fifteen of the 28 commercial entities had access to a fax machine on site; however, many reported that sending a fax over the phone lines was either too expensive or too cumbersome to use on a regular basis.

23 The higher average cost compared to the median range is due to a high outlier.

3.6. Transportation

Transportation for businesses based in Kumasi is overwhelmingly dependent on ground transportation. Ninety-three percent of respondents identified either trucks or cars as the primary transport mechanism for raw materials. The two businesses that indicated that they primarily used boat/sea transportation for raw materials also required trucks to transport the raw materials from the port at Tema to the business location in Kumasi. Of the nine entities citing cars as their primary mode of transportation, four of them needed access to remote areas for raw materials and often used “motorbike” and “foot transport” in conjunction with cars. Neither air nor rail transport was cited for any significant transportation purposes.

Charts 7 & 8 – Method of Raw Material and Finished Product Transport

Raw Material Transporta Finished Product Transportb

Boat 4% Car 15% Car 32% Truck 36% Customer pickup 12%

Truck Boat 69% 7% Boat and truck 25%

aAnalysis of all 28 businesses bAnalysis of 26 businesses that replied

3.6.a. Ground Transportation

As the second most frequently cited constraint of doing business in Kumasi, ground transportation – particularly the road network – needs improvement. However, the perception of the road conditions by commercial entities in Kumasi varies widely. While nine of the 28 businesses listed road conditions and congestion as the most challenging infrastructural aspect of doing business in Kumasi, 11 businesses stated that the road system was not a barrier to productivity. Those businesses that cited road conditions as an issue were primarily located near the city center or were dependent on the use of roads for the import of raw materials or the delivery of finished goods to remote areas.

Raw Materials & Finished Product Delivery Truck/Car - About half of the businesses interviewed obtain raw materials from outside of the Kumasi area and the other half receive their raw materials from the Ashanti region with occasional supplements of machinery from abroad. Of the businesses interviewed, the average transport distance for raw materials via car or truck is 144km, and the average time allotted to receive raw materials via car or truck is 13.6 hours. While travel time between Accra, Tema and Kumasi are fairly consistent, unexpected delays when receiving and delivering goods to and from

the Northern and Volta regions force companies to remain flexible. Additionally, schedules for delivery and receipt of shipments are continually disrupted along the roads to Togo, Burkina Faso and the Ivory Coast.

Many of the businesses commented on the increased time to receive raw materials during the rainy season – sometimes doubling the delivery time. Others have altered shipping schedules in order to avoid the city center of Kumasi during the day and have their trucks start before 5am.

Costs A vegetable and nut oil producer stated that his cost of shipping via truck in and around Kumasi amounts to GH¢40 for a five ton load to travel approximately 6km.

Although difficult to quantify, businesses indicate that the condition of the roads outside of Kumasi and the congestion in the city center greatly increase their cost of doing business. One small woodworking business estimates that the cost of collecting raw materials increases by 50% during the rainy season when the roads to the north wash away. A mid-sized pharmaceutical company estimated a 15% increase in the cost of doing business due to road congestion based on fuel costs, idle time, overtime pay, truck repairs and time diverted because of other inefficiencies due to sitting in traffic. A building and metals business stated that road conditions outside of the Kumasi central area hinder raw material transport and decrease his vehicle efficiency by 70%.

Road Projects As of June 2007, the city of Kumasi had a road network of 846km; of those, 271km were asphalted or had a bitumen surface.24 Efforts are being taken to improve the often congested and poor roads.

Railway An obvious gap in the infrastructure of Kumasi is the absence of a reliable and available railway system. Two of the businesses mentioned that they relied on rail for their business in the past, but that the system is now defunct and no longer an option for Kumasi. Of the 28 businesses interviewed for this study, none use rail transportation; however, 20 of the businesses indicated that they would use rail if it were available, cost effective and reliable. In reviewing the almost desperate traffic situation in Kumasi, a railway would allow businesses to choose among cost effective shipping methods and would perhaps relieve some of the burden on the roads and vehicles.

24 Kumasi Metropolitan Authority (2007). A Brief Guide to Kumasi.

A major infrastructure gap: the defunct railway systema

a Photo taken by author

3.6.b. Air Transportation

The Kumasi Airport (KMS) is located approximately 10km northeast of the city center. Currently there are two airlines servicing Kumasi – Antrak and CityLink – with more than 14 flights per week. The primarily destination is Accra, but the airport also serves Sunyani (on CityLink).

The majority of the businesses interviewed (21/28) do not use air transportation for cargo or personnel on a regular basis.25 Ten of the businesses reported using the Kumasi airport once every few months for the transport of executives to Accra on special occasions – generally when there was a time constraint making the 1 hour of air travel preferable to the three to four hour drive to Accra.

Currently, there are no passenger or cargo flights servicing international destinations from the Kumasi Airport. The two businesses requiring international travel services mentioned the need for a more developed local airport to cut down on travel time between Accra and other international destinations, including West African regional hubs. Both hotels interviewed described the desire for a bigger and more international airport in Kumasi to attract tourists.

The cost of a round trip ticket from Kumasi to Accra on either airline is between GH¢160 – 170. Cargo transportation from the Kumasi Airport was not used sufficiently to conduct an analysis of the services offered or price points.

25 “Regular basis” is defined as at least one flight per company per month.

3.6.c. Port Access

One of the benefits of Kumasi’s location is its close proximity to the ports of Tema and Takoradi on the southern coast of Ghana. The port of Tema, located 28km east of Accra, handles 80% of the nation’s import and export cargo and boasts 14 berths – 12 of which are for public use.26 Although now much smaller than Tema, Takoradi is effectively used for connecting cargo to the middle and northern part of the country, as well as to the countries north of Ghana. Takoradi is located 230km west of Accra.27

In addition to desiring an airport with international destinations, four of the nine businesses that import raw materials or machinery expressed a need for customs clearance at the Kumasi Airport. For a large printing company, one week is added to every shipment from Malaysia because of time spent clearing customs in Tema. Some of the businesses utilizing the ports at Tema must send employees to Accra to work through customs inspections and receive the goods. This adds monetary and time costs to their transactions and has increased the urgency for an inland port. A few businesses mentioned plans for a dry-port in Kumasi that would function as a bonded warehouse and would include all of the formalities that currently occur in Accra. This inland port would alleviate costly trips to Tema and benefit the business community of Kumasi.

International Freight Nine businesses receive goods via boat. The entities indicated the following shipment times: Asian ports require 5-6 weeks; European ports require 1 – 2.5 months (e.g., The Netherlands = 10 weeks, France = 8 weeks); Egypt and South Africa require 6 weeks. For a large timber company, it takes approximately one month and costs GH¢2000 to ship a 40ft container to a European port.

3.7. Land

Availability Land is available and affordable in the Ashanti region; 86% of respondents said that there is sufficient land available for expansion. Although 10% of the businesses interviewed (3/28) ranked land as their primary infrastructure constraint, the challenges were related to the proximity of new land to existing business investments and lengthy acquisition and approval processes. The average distance to land available for expansion is 5.1km from the existing business location. This frustrates some businesses that perceive the land outside of town to be unfavorable – particularly businesses that rely on sales of small quantities of goods to many customers. The businesses that sell furniture, agriculture or timber by contract or in bulk did not report disruptions given their distance (6km or more) from the city center.

Ownership

26 Ghana Ports and Harbours (2006), Port of Tema Introduction, http://www.ghanaports.gov.gh/GPHA/tema/index.html. 27 Ghana Ports and Harbours (2006), Port of Takoradi Introduction, http://www.ghanaports.gov.gh/GPHA/takoradi/index.html.

Of the 28 entities interviewed, 19 own all of the land used for business purposes. Seventeen of those 19 owners consider their tenure secure. The two who expressed concern regarding tenure stated that, as Ghanaian citizens, their tenure was renewable after 99 years but that the decision was up to the discretion of the Chief. Private land for foreign-owned businesses can be secured for 50 years but is subject to the same renewal process with the owning Chief.

Process Per the KMA, the Kumasi Planning Area is approximately 10km in diameter.28 Of this land, the Chiefs own 60% and the remaining 40% is vested in the government for public interest.29 The land management system – a shared role between the Chiefs who grant the land and the municipal planning unit who approves its intended use – contains redundancies and is a source of frustration for many of the businesses looking to expand. The average length of time needed to navigate the acquisition and approval processes was reported to be 11.4 months.

Cost The cost per acre was difficult to calculate, as many business managers were not working at the company when the land was acquired. Additionally, those that remembered were quick to note that the purchase prices from the late 1990’s would not accurately reflect current prices. Additionally, the cost per acre differs drastically depending on the area of the city in which the land is located. The average cost of an acre of land in Kumasi is GH¢10,000.30 For renters, the average price of an acre is between GH¢150 – 200.

3.8. Security

The physical security of investments and personnel in Kumasi is not a concern or constraint on business activities. Twenty of the 28 businesses interviewed said that security is not a concern for their business. Eight of the entities outsource 100% of their security measures, while 17 provide their own security - most commonly in the form of one or two watchmen.31 The average cost of securing a business in Kumasi is GH¢580 per month. 32

28 Kumasi Metropolitan Authority (2007). A Brief Guide to Kumasi. 29 Ibid. 30 According to a pharmaceutical company, one acre near the central market in the city’s central district can cost as much as GH¢610,000. 31 The additional three businesses do not take security precautions. 32 This does not include the high outlier of the group that spends approximately GH¢20,000 per month to guard a large brewing facility. Including that business would increase the average cost to GH¢1273.

4. OPPORTUNITIES FOR INFRASTRUCTURE INVESTMENT

4.1. Renewable Energy The recent improvement of the electricity supply is due to current energy projects in both hydropower and liquefied petroleum gas (LPG). However, given the rapidly increasing demand, a market for renewable energy is developing. The emerging renewable energy industry in Ghana represents a unique opportunity to simultaneously drive business development and improve the lives of local farmers and small business owners in the Ashanti region while protecting the natural environment. There is already evidence of farmers using animal dung for gas and agro-processors using palm waste as fuel for steam generators, but a more formalized market would greatly benefit the businesses of Kumasi.

Business owners indicated that financing is often the largest hurdle to starting these investments. The Government of Ghana is already subsidizing the price of LPG at approximately 20%.33 The Government may wish to consider providing subsidies or other support mechanisms to help enable the development of this industry.

Ghanaians use biomass for more than 50% of energy consumed in the residential and commercial sectors.34 Firewood is the primary fuel followed by charcoal - the bulk of which (90% in 2003) is obtained from natural forests.35 Efforts should be made to provide substitutes for these energy sources for economic, environmental and health reasons. Ghana has a President’s Special Initiative focusing on palm cultivation. This initiative, coupled with appropriate financing tools, could create an opportunity for lucrative investments in biodiesel. This would be a perfect fit for this generator-dependent market and has potential to be an export commodity as well.

Benefits of a local biofuels industry: - Higher prices and demand for local crops such as palm and coconut; - Improved energy security and decreased dependence on oil and natural gas imports; - Carbon neutrality under the Kyoto protocol; - Lower pollution and potential decrease in respiratory illness; - Reduced energy costs and improved energy access for businesses; - Potential for Clean Development Mechanism credits; - Development opportunities and job creation.

Availability and cost of energy sources is an important contributor to economic growth in a region where energy costs and reliability are two of the major constraints to business development.

33 “Petroleum Products Price Build Up, effective March 16, 2008” published by Ghanaian Ministry of Energy. 34 Energy Commission, 2005. 35 Ibid.

Box 5 - Spotlight: Appiah-Menka Complex

Appiah-Menka Complex Ltd. is a large family-run business that produces soap, refined oils, stearin and palm fatty acid. The most challenging parts of the business are the costs of electricity/energy and the difficulty in securing bank loans for long term investment projects. The opportunity to enter the biofuels market is evident to the Appiah-Menka Complex – the company has an abundance of palm oil that could be used for biodiesel production. The company is also looking to acquire more land for palm cultivation through the President’s Special Initiative program. Additionally, Appiah-Menka decided to plant close to 6,000 hectares (~15,000 acres) of palm and expects to reap the rewards after the first fruiting period in 2009. Those hectares are each expected to yield approximately 84,000 fruits in total. An extraction rate of 20% would yield 16,800 tons of crude palm that can be mixed in varying degrees with diesel fuel to power generators, tractors and cars.

The relative ease in launching this line of business for Appiah-Menka Complex is that most of the initial investment in equipment and materials is complete. Appiah-Menka Complex already produces 50 tons of crude palm oil each day on their existing machines; therefore, knowledge and skill transfer will be efficient. Source: Adapted from conversations with Kwaku Appiah-Menka II, 2008

4.2. Road & Railway Privatization Evidence of road maintenance and improvements can be seen throughout the city which should provide a relief for many businesses. However, a population growth rate of over 5% will outpace the growth of new roads.36 The road constraint is hugely important to the agriculture sector and agrobusinesses located in Kumasi as they use the feeder roads, often in poor condition or washed away during the rains, for access.

There is an opportunity to develop private toll roads, particularly for use with businesses that regularly need to access areas just outside of central Kumasi. Given the increased costs associated with vehicle usage and raw materials acquisition, the benefits of using private roads would likely outweigh the costs of tolls and would be a healthy investment project.

A dependable and connected railway network would be of huge benefit to the businesses in Kumasi – particularly those that are receiving raw materials from neighboring West African countries. The congestion and condition of the roads has businesses looking for alternatives, particularly for connecting with neighboring countries. The Government has recently signed deals with two private companies to reconstruct the eastern and western railways within Ghana.37 There is also interest in an efficient passenger train to Accra. Although the businesses interviewed rarely utilized the Kumasi airport, when they did, 90% of the time, it was for meetings and business dealings in Accra. A fast commuter train on which they could work, have meetings and avoid traffic and high fuel costs would be a welcome addition to the transportation system.

36 The World Bank initiated a $45M Urban Transport Project in 2007 to improve mobility in urban areas. This may alleviate transport stress in the coming years. 37 Invest in Ghana: Focus Kumasi, 2008.

4.3. Recycling/Scrap Dealers Kumasi’s informal sector of waste collection and recycling is vibrant and resourceful, but formalizing the industry will benefit investors and the city of Kumasi. Forty percent of the refuse in Kumasi is left uncollected. 38 Factors that highlight the opportunity for private sector investment in the waste collection industry are: an excess of uncollected refuse (high demand), a new waste-to-energy power plant, and a concentration of industries that depend on recycling services (e.g., bottling and printing).

Currently the private refuse collector, Zoomlion Ghana Ltd,39 has entered the trash collection business in Ghana but has yet to saturate the market and is doing little in the way of recycling.40 Many of the businesses interviewed saw recycling not only as environmentally friendly, but also as a smart way of re-using cheap, local materials. Two industries in particular, beverage production/bottling and printing, have expressed a need for more formalized recycling services.

Box 6 - Opportunity: Suame Magazine Industrial Development Organization (SMIDO)

Suame Magazine, the leading cluster industrial area in sub-Saharan Africa, is bursting with potential. The area has a population of over 200,000, including 12,000 shop-owning proprietors.

Most cluster estates in Africa are in the inform al sector, but the importance of development in this area should be emphasized. Suame Magazine has strong vertical and bilateral linkages with garages, metal workshops and engineering firms. Fifty-three percent of Suame Magazine workers are involved in some type of vehicular repair, 17% in spare parts retailing, 17% in metal processing, 10% in fabrication and 3% in vehicle assembly. As a result, Suame Magazine plays a crucial role in providing technical and vocational training to young people that have dropped out of formal schooling.

There is plenty of skilled labor in the area. Given these resources and the tradition of recycling scrap metal for profit, the right tools and training could easily transform the area into a recycling center for Kumasi.

Source: Adapted from “SMIDO Industrial Policy Blueprint,” 2007.

38 Kumasi Metropolitan Authority: (2007) A Brief Guide to Kumasi 39 ZoomLion Ghana Ltd is an affiliate of Zoomlion China. 40 As of June 2007, the World Bank’s Urban Environmental Sanitation 2 Project still has $57.9 M to disburse in Ghana, which could relieve urban sanitation issues before the project closes in 2010.

5. CONCLUSION

Kumasi is a city of great potential. Even in the face of the infrastructure challenges outlined in this study, entrepreneurs and business owners find creative solutions to the problems they face. Investors will find Kumasi a welcoming city with an affordable standard of living compared to the more expensive lifestyle of Accra. The tourist sector is growing, contributing to an influx of high-end hotels and restaurants that will be helpful in attracting executive talent to the area. The safety, affordability and growth of the working-age population provide vast opportunities for investors.

6. APPENDIX

6.1. Infrastructure Survey

1. Basic Information What types of products/services do you provide?

How many employees do you have?

What general sector does the business fall under:

2. Electricity 2.1. Current options Are you currently connected to the electricity grid? Do you have own resources of electricity such as a generator? What is your current monthly electricity demand in watts or kilowatts?

2.2 Quality of supply and Does the supply keep in the limits of the promised frequency? How interruptions and vendor frequently is supply interrupted (number of times per week or month)? response How long do service interruptions last?

2.3 Coping strategies What strategies do you use to cope with low quality supply and supply interruptions (generators, closing down, etc.)? Describe type of backup power supply and equipment. What are the costs associated with back-up power for your business?

2.4. Cost Do you have a special agreement with the supplier? What is the rate structure?

2.5. Time to establish a Describe how the connection was established and how long it took. connection What was the contribution of the consumer to establishing the connection?

3.2 Quality of supply and Does the supply keep up with your current demand? How reliable is interruptions and vendor the supply? How frequently is supply interrupted? response 3.3 Coping strategies What strategies do you use to cope with low quality supply and supply interruptions?

3.4. Cost Describe the prices and taxes for each energy source. Do you have a special agreement with the supplier(s)? What is the cost structure? How is the payment arranged? Do the rates seem fair? How have prices changed in the last 1, 5, and 10 years?

4. Water 4.1. Source Describe your current source of water. Where does the water come from (groundwater, reservoir, etc.)? How far away is the source from your facilities?

4.2. Supply interruptions How frequently is supply interrupted? How long do service and vendor response interruptions last? Which form of communication is established with the supplier in case of interruptions? Is there any fallback available?

4.3. Quantity How much water is typically consumed for business purposes in liters/week or month (irrigation, toilets, cooking, livestock, machinery, etc.)?

4.4. Quality What is your perception of the quality of the water? Have you taken any steps to test the water? Does your firm treat or process water for any purpose? If so, please describe.

4.5. Coping strategies What strategies do you use to cope with supply interruptions?

4.6. Cost What is the rate structure? How is the payment arranged? Do the rates seem fair?

4.7. Seasonality Is there substantial season-to-season variation in quality or reliability of water supply? To which extent rainwater is used for industrial purpose?

5. Wastewater 5.1. Structure of How does your firm dispose of wastewater? Have you outsourced the wastewater treatment wastewater treatment?

5.2. Capacity to handle What pre-treatment is required prior to feeding industrial effluent into industrial effluent municipal systems?

5.3. Regulatory Describe your interactions with the authorities responsible for environment wastewater treatment.

5.4. Cost Describe the cost for wastewater treatment.

6. Telecommunication 6.1. Time to establish Does your business rely upon landline or mobile telephone? Describe landline connection how the connection was established and how long it took.

6.2. Cost structure Describe the installation and utilization cost both for landline and cellular connections (local, in-country and calls outside the country). Include also fax services.

6.3. Internet services Does your business have access to the internet? Describe the providers and connection options? What is the rate structure? What is the method of connection (dial-up, landline broadband, wi-fi, satellite?

6.4. internet connection What is the typical connection speed? Do connection speeds inhibit speeds use? How frequently is connection interrupted?

7. Solid waste 7.1. Availability of solid What methods are used to dispose of waste (i.e. incineration)? Is there waste disposal service a recycling system (informal, formal) established? Is there any quality management in place? Have you outsourced the solid waste disposal?

7.2. Cost Describe the rate structure for disposal.

7.3. Industrial waste What kinds of services and facilities, if any, are available to handle industrial waste?

8.1a Does the condition of the roads hinder your ability to either receive or ship goods? How much do road conditions add to your business – both in man-hours and money?

8.3. Main statistical Miles of paved road/1000 people (urban area only), miles of paved indicators road/1000 people (state or province)

9. Air transport 9.1. Availability Does your business make use of air for transporting people or goods?

9.2. Frequency of use? If so, how often?

9.3. Cost How much do you pay for air transport on a monthly basis? How have air transport costs changed over the last 5, 10 years?

9.4. Reasons for non-use If not, why don’t you make use of air transport?

10. International freight 10.1. Availability Describe the options that your firm regularly considers: Rail? Port? Air freight?

10.2. Cost What is the cost to transport a container to a major European port? What is the preferred method? What is the transit time?

10.3. Storage Are warehouses, including bonded warehouses, and storages, including cold storages, available? Describe how access to storage facilities, including refrigeration, impedes your business.

11.2. Availability If you wanted to expand operations, is there a sufficient supply of affordable land available to meet expansion needs? How long would it take you to obtain additional land?

11.3. Zoning Are there zoning restrictions that limit what you can do on your site?

12. Security 12.1. Major Are there security considerations that significantly affect your considerations business?

12.2. Defensive measures What measures does your firm customarily take to ensure the security of its facilities?

12.3 Cost What are the costs associated with securing your facilities?

13. Of all the categories we discussed today, which causes the greatest constraint to your business?

6.2. References

Akuamoa-Boateng, Abenaa (2008). Project Manager, Millennium Cities Initiative Kumasi: interview on January 23, 2008.

Appiah, E.K (2008). Regional Engineer, Ghana Water Authority: interview on January 15, 2008.

Appiah-Menka, Kwaku II (2008). Executive Director, Appiah-Menka Complex Ltd: interview on January 22, 2008.

Baden-Powell, R.S.S. (2007). “The Downfall of Prempeh: A Diary of Life with the Native Levy in Ashanti 1895-6,” http://www.pinetreeweb.com/bp-prempeh-large-map.htm.

Baker, Don (2008). Energy Consultant, Natural Resources Management & Development Institute at Auburn University: interview on January 17, 2008.

Caliph, Mohamed (2007). “Waste to Energy Plant for Kumasi.” The Daily Guide Ghana, http://www.dailyguideghana.com/portal/modules/news/article.php?storyid=2260.

Frempong, Godfred K. (2007). “2007 Ghana Telecommunications Sector Performance Review: a supply side of policy outcomes,” Science and Technology Policy Research Institute. Research ICT Africa., http://www.researchictafrica.net/.

Ghana Ports and Harbours Authority (2006). Port of Takoradi Introduction, http://www.ghanaports.gov.gh/GPHA/takoradi/index.html.

Ghana Ports and Harbours Authority (2006). Port of Team Introduction, http://www.ghanaports.gov.gh/GPHA/tema/index.html.

Gillwald, Alison and Stork, Christoph (2006). “Towards an African e-Index: ICT Access and Usage Across 16 African Countries,” ICT Sector Performance Review, http://www.researchictafrica.net/images/upload/Cairo.pdf, p. 11.

Hypriest, Osei. (2008). “Work on Waste-Energy Plant Started.” Ghana News Now! (January 13, 2008), http://ghananewsonline.blogspot.com/2007/05/work-on-waste-energy-plant-started.html.

Kumasi Metropolitan Authority (2007). A Brief Guide to Kumasi.

Owusu-Peprah, Peter (2008). Regional & Maintenance Engineer, Electrical Company of Ghana: interview on January 15, 2008.

The World Bank (2007). “Status of Projects in Execution – FY07 SOPE,” Operations Policy and Country Services, http://www1.worldbank.org/operations/disclosure/SOPE/FY 07/SOPE_FY07_FINAL.pdf.

United States Department of Energy (2003). Energy Information Administration: West African Gas Pipeline (WAGP) Project, http://www.eia.doe.gov/cabs/wagp.html.