Integrating informal actors into the formal dairy

industry in Kenya through training and certification

Towards Priority Actions for Market Development for African Farmers. AGRA Conference. 13-15 May 2009, Nairobi, Kenya

Amos Omore and Derek Baker, ILRI, Nairobi, Kenya

OutlineRole of informal businesses in pro-poor

development Dairy policy change as a means of

addressing poverty: example of Smallholder Dairy Project (SDP) in Kenya

The training & certification intervention BDSHighlights of SPIA-led Policy-oriented

research impact assessment (PORIA) of the intervention (Kaitibie et al, 2008)

Extensions beyond KenyaChallenges

Poverty and Agricultural Development

Started with UN’s declaration of 1996-2007 as the Decade of Eradication of Poverty

Quickly followed by PRSP’s as basis for multilateral lending

Poverty and hunger eradication central in MDGs agreed in 2000

Causality from agriculture-led economic growth to poverty reduction has been widely questioned

2008 World Development Report has evidence Few livestock dev projects before MDGs were

designed to impact the poor Many agencies now look at livestock-mediated

poverty alleviation favourably

Role of informal businesses in pro-poor development

They dominate production, processing and delivery and employs many

The majority poor (& many not-so-poor) depend on them

Policy has historically focussed on their displacement by formal capital intensive production & marketing

Vested interests often re-enforce their displacement

Available services have not tailored to them Basis for more widespread agro-industrial

development has thus been stultified

Integrating informal into formal value chains?

Formal

•legal•richer•highly capitalized •highly organized •well-connected •higher-priced products•In dairy: cold chain, pasteurization, packaging

Informal

•legal status?•poor, small-scale•myriad, often part-time •haphazardly organized•voice-less •discouraged / no policy support •Lower priced products•In dairy: raw milk sales

Informal actorsFormal industry

How?

The dairy sector in Kenya Predominantly based on smallholder production

with and informal milk marketing– >86% of all marketed milk is sold as raw milk to

consumers 1.8M dairy-cow owning households 350,000 full time employees Majority of all dairy marketing jobs (over 40,000)

are in the informal sector Poor consumers access affordable milk through

informal market, and it is almost invariably boiled before use

Milk channels

Policy environment – pre 2004

Dairy policy based on industrial cold-chain model– 1958 Kenya Dairy Act– Sales of raw milk effectively criminalized in urban areas

Kenya Dairy Board (KDB) main regulators– But does not reflect range of dairy sector stakeholders– Harassed and arrested informal traders– Informal traders unlicensed and unable to access training on milk

handling– Perceived concerns about poor milk quality and public health risks

Powerful private sector actors put pressure on KDB to stamp out informal trade

Smallholder Dairy Project

Collaborative research and development project (1997-2004), funded by DFID, implemented by– Ministry of Livestock and Fisheries Development– Kenya Agricultural Research Institute– International Livestock Research Institute

Objectives:– Characterise dairy sector and develop appropriate technologies to

overcome constraints affecting dairy-related livelihoods– Influence policy and institutional reform in support of dairy-related

livelihoods Policy Analysis and Advocacy:

– from 1999 increased emphasis on policy outcomes, with focus on informal milk market issues

– With stakeholders, developed explicit policy advocacy strategy– DFID assigned full time Junior Professional for policy advocacy

Informal market issues SDP Research showed that:

– Informal markets critical for access for poor producers and consumers

– Important employment: 1.7 full time jobs for every 100l milk handled daily

– High transactions costs due to rent seeking, milk spoilage, confiscation, small scale

– Disincentives for entrepreneurial activity, and for scaling up– Variable milk quality, although risk assessment showed low risk to

human health due to boiling– Licensing alone not associated with better milk quality– Training of market agents could improve quality, reduced losses

and costs, provide standards Evidence implied a different model for dairy marketing

policy in Kenya, with a key role for informal sector

Milk Traders

Training Service Providers (BDS)

Regulatory Authority

Certific

ation/Lice

nsing

Training & certificates of

participation in training

Accreditation & monitoring

Reporting

Cess f

ee

Training guides

Piloting policy-related interventions: Training & Certification using a BDS

Approach

Policy environment - now Positive engagement by KDB with small-scale milk vendors

– Training and certification, with incentive system– Subsidiary legislation changed to allow changed approach– Establishing and accrediting NGO and private business development

services (training) to informal sector actors– KDB field officers: check for licenses; conduct inspection of premises

(hygiene and handling); provide advice on how to get licensed; issue movement permits; assist with paperwork on licensing

KDB has signed East Africa Dairy Regulators Authorities Council (EADRAC), which recognizes and harmonizes approach to SSMVs

New Dairy Act in parliamentary process– Explicitly recognises role of SSMVs– Commits to engaging with informal sector for training and quality

improvement

Small Scale Milk Vendors Now

Nearly all encountered now licensed, with milk bars (49%) and milk movement (44%) permits most common

85% now trained on milk handling and quality control

90% believe it is now easier to obtain licenses than before policy change

Significant compliance generally allows one to operate, hence unlicensed SSMVs are not so much harassed anymore

Source: ILRI/PORIA survey

SDP Advocacy Strategy

ILRI

KARI

MoLFD

SDP

ITDG ActionAid

IPAR

Advocacy partners

SITEPolicy influencing

targets

Other researchers

Research partners and collaboratorsUniversities; NGOs;

farmers; traders; KDB

Farmers & farmer groups

PublicMPs

DFID

Ministries

KDB

Processors

Partners and Linkages:

ILRI

KARI

MoLFD

SDP

ITDG ActionAid

IPAR

Advocacy partners

SITEPolicy influencing

targets

Other researchers

Research partners and collaboratorsUniversities; NGOs;

farmers; traders; KDB

Farmers & farmer groups

PublicMPs

DFID

Ministries

KDB

Processors

ILRI

KARI

MoLFD

SDP

ILRI

KARI

MoLFD

ILRIILRI

KARIKARI

MoLFDMoLFD

SDP

ITDG ActionAid

IPAR

Advocacy partners

SITE

ITDGITDG ActionAidActionAid

IPARIPAR

Advocacy partners

SITESITEPolicy influencing

targets

Other researchers

Other researchers

Research partners and collaboratorsUniversities; NGOs;

farmers; traders; KDB

Research partners and collaboratorsUniversities; NGOs;

farmers; traders; KDB

Farmers & farmer groups

Public

Farmers & farmer groups

Farmers & farmer groups

PublicPublicMPsMPs

DFIDDFID

Ministries

KDB

Processors

Ministries

KDB

Processors

Partners and Linkages:Partners and Linkages:

Elements:- Steering committee of key industry stakeholders- Partnering with key NGO and other advocacy organisation- Regular presentation of evidence at stakeholder meetings- Field visits by decision makers- Pro-active use of public media- High level Policy Forum

Policy change process

Source: Leksmono et al, ODI Working Paper 266, 2006

Simplified representation of policy change process

SDP Research and communication activities

KBD dominated by processors

Harassment of informal traders

SDP Policy Focus

Policy change

NGOs work at grass roots with farmer groups

Milk War

SDP Dairy Policy Forum

NGOs become SDP partners

Attitude & behaviour

change

New GovernmentIncreased Citizen Voice

DFID Snapshot review of SDP

Safe milk campaign

2000 to 2003 2004 2005

SDP Research and communication activities

KBD dominated by processors

Harassment of informal traders

SDP Policy Focus

Policy change

NGOs work at grass roots with farmer groups

Milk War

SDP Dairy Policy Forum

NGOs become SDP partners

Attitude & behaviour

change

New GovernmentIncreased Citizen Voice

DFID Snapshot review of SDP

Safe milk campaign

2000 to 2003 2004 20052000 to 2003 2004 2005

Source: Leksmono et al, ODI Working Paper 266, 2006

Applied impact pathway in an ex-poste analysis Used an equilibrium displacement model to evaluate the

distribution of gains from policy change (e.g. Freebairn et al. 1982)

Reduction in transaction costs or market margin drives increased farmgate prices, reduced retail prices, increase in quantity of milk supplied to the market

Data: surveys of small scale milk market agents and KDB field officials in Aug 2007, and elasticity estimates by Selasya et al, 2006.

IA: Method

Changes in milk quantities handled

100.792.8

55 48.3

78.1 71.9

450.9 447.1

67.7 66.7

252.1 249.9

0

50

100

150

200

250

300

350

400

450

500

Purchased Sold Purchased Sold Purchased Sold

Nairobi/Thika Nakuru All locations

Qu

anti

ty o

f m

ilk (

litre

s)

Before policychange

After policychange

Average daily quantities of milk purchased and sold by SSMVs before and after the policy change.

Estimates of market margins

Type of businessNairobi/Thika price (KSh/litre) Nakuru price (KSh/litre)

Purchase Sale Margin Purchase Sale Margin

Before policy change

Average for all SSMVs

15.35 21.48 6.13 14.42 20.85 6.42

After policy change

Average for all SSMVs

16.60 21.93 5.33 15.81 21.96 6.15

Margin reduction attributed to policy change 0.80 0.27

Average margin over all locations and trader types, before policy change; 6.26

Average margin over all locations and trader types, after policy change; 5.72

Reduction in margin attributed to policy change; 0.54

Due to reduced: spoilage, rent-seeking, confiscation

Estimates of welfare benefits

Annual change in benefits (with 2005 as year when benefits start accruing)

Scenario

Economy-wide(Million US $)

Nairobi area gross benefits

(Million US $)

Benefits to consumers 8.01 1.46

Benefits to producers 16.04 2.98

Benefits to SSMVs 4.32 0.75

Benefits to input suppliers 5.09 0.90

Total benefits 33.46 6.09

Less annual SDP expenditure (1997-2004)

0.63

Less annual costs of training and licensing by SSMVs (2005-2039)

0.58

Less annual cess fees (2005-2039) and municipal, council costs

12.72

Annual Benefits minus costs (2005-2039) 19.53

Net Present Value (@5.00%) (to 2039) 230

Impact Analysis: Distribution of benefits

Reduction in margin due to reduced spoilage, rent-seeking 10+%Annual benefits to Kenya economy

To consumers: $8MTo producers: $16MTo traders: $4MTo input suppliers: $5MTotal gains: $33M

Incremental gain at individual level, but substantial at aggregate level

Beyond Kenya Under a Regional Project on Rationalisation and Harmonisation

of Dairy Policies, Regulations and Standards in Eastern and Central Africa (led by ASARECA)

– Standardization of curriculum for training of informal milk traders for 5 countries in EA, harmonized generic training guides for traders and their trainers for 5 countries in EA

– Formation of East Africa Dairy Regulators Authorities Council (EADRAC): MoU agreed in 2006 and Signed in Jul 2007

– MoU between EADRAC and EAC for wider political support being negotiated.

– The highest Uganda Government officials recently issued a letter to relevant authorities to consider implementing it

India– Approach being adapted and piloted in Assam NE India

(97% informal market)

Lessons Research evidence must be robust, reliable,

relevant to interests– both socio-economic and technical– communicated repeatedly, through multiple channels

Partnerships with credible advocacy voices– civil society – same agenda but different capacity

May use the public media Support politician’s own agendas Ground-level policy implications need to be tested

– Community level research is relevant to national and wider policy

Challenges Improved definition and characterisation of informal sector

beyond dairy– Linkages between informal sector and poverty reduction esp.

amongst vulnerable groups in relation to market participation Re-examination of Charmes’ (2000) exploratory work on

informal sector is timely – Risk management, sales, employment, emigration orientations,

effective use of pro-poor development resources– Tracking impacts over time, comparing and contrasting formal and

informal sector’s persistence, performance and synergy, Improved methodologies for analysis of informal value

chains Means by which formal and informal sectors can co-exist

– Incentives surrounding the efficient functioning of these linkages and their effect on welfare

Thank you

Authors: Simeon Kaitibie, Amos Omore, Karl Rich, Beatrice Salasya, Nicholas Hooton, Daniel Mwero and Patti Kristjanson www.ilri.org and http//: impact.cgiar.org

Appendix 1. PORIA data sources and methods

SDP findings and SDP costs – SDP reports and files, ODI/ILRI study on SDP learning processes

SDP outputs – SDP reports and other outputs

Policy influence, policy and behavioural changes – SDP reports and other outputs, interviews with policy makers,

regulators and SSMVs

Economic impacts – SDP reports; Equilibrium displacement model (see Freebairn, Davis,

and Edwards, 1982; Wohlgenant, 1993); NPV

Attribution of impacts/counterfactual – Interviews with SDP actors; NPV with SDP compared NPV without

SDP

Appendix 2:ODI Study

Informal Traders Lock Horns with the Formal Dairy Industry: The role of research in dairy policy shift in Kenya. ODI Working Paper 266, Leksmono et al, 2006

RAPID Outcome Assessment (Research and Policy in Development Assessment)– Tracking back from policy change: Episode Studies of

specific policy change– Tracking forward from research: case study analysis– Outcome mapping: observing behaviour change

among policy-makers and stakeholders

Appendix 3: Values for estimating welfare changes attributed to new dairy policy

Variable description Value (Nairobi area)

Value (Kenya-wide)

Source of information

Raw milk production 493 million liters

4016 million litres

SDP, updated (SDP Policy Brief #10, September 2006)

Retail price Ksh 21.70/liter

Ksh 21.57/litre Study survey (averaged over all locations and SSMV sales

Farm price Ksh 15.97/liter

Ksh 15.58/litre Study survey (averaged over all locations and SSMV purchases

Non-market input cost per unit of output

Ksh 6.90/liter Ksh 7.06/litre Estimated using data from Salasya et al. (2006) and updated SDP milk production data

Elasticity of milk demand at retail

-0.97 -0.97 Salasya et al. (2006)

Elasticity of milk supply at farm

0.35 0.35 Salasya et al. (2006)

Elasticity of marketing services supply

2 2 Freebairn et al. (1982)

Cost reduction due to changes in transaction costs and elimination of NTB

Ksh 0.80 KSh 0.54/litre Study survey, decrease in retail farm price margin (comparing before and after policy change)

Appendix 4: Counterfactual- NPV with/without SDP

Time delay Real interest rate (%)

NPV without SDP

(US$ million)

NPV (with SDP minus without SDP)

(US$ million)

Legalization occurs 10 years later

5 124.01 106.43

IRR(%) 108

Legalization occurs 20 years later

5 56.07 174.37

IRR(%) 62

Based on NPV with SDP of $230M