Kenya as a services hub The role of services in economic transformation

Dr Julius GatuneAfrican Center for Economic Transformation (ACET)

SET workshop Intercontinental Hotel, Nairobi

28th April 2015

Production Marketing and distribution

Logistics Processing

90% of Value10% of Value

Agriculture plays and Key Role in Kenya Economy, however full potential yet to be tapped

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..True potential will come from transformed agricultural value chains

Services are key to transformation of the

agricultural value chains

Agriculture generates about 52% of GDP (25% directly and 27% through manufacturing, services and distribution). However the full potential is yet to be un-locked as structured

• Agricultural growth has not translated to poverty much reduction• Too many people working in low productivity farm jobs yet a

transformed value means more jobs upstream • Marketing not production should be the locomotive that drives

the chain

Production Marketing and distribution

Logistics Processing

52% of Value48% of Value

Be

Production structure

Marketing and distribution

Issues

Kenya Agricultural value chains have many challenges

Logistics Processing

Policy Questions

•Who to support (small holder ?)

•What to subsidize? (inputs or Info?)

•Farmer organization

• Formal vs informal (milk trader question)

• Market infrastructure (govt vs private vs PPP)

• Artisanal vs formal• Trade policy e.g

Sorghum bread)• Industrial policy-

equipment fabrication, vs imports

• Food imports bans vs tariffs?

• Mandates vs incentives• PPPs for market and

distribution

• DEGRP and BMGF has given grants to ACET to study how to improve agric. supply chains

• ACET study sought to better understand the challenges of Kenya agric. value chain and potential interventions

•Low yields–Saved seeds–Inputs (fake, costly)–Low knowhow

•Poor quality –Equipment lack–Cheating–Mixing varieties

•Labor challenges •Subsistence

orientation

• Post-harvest losses (upto 50% reported)–Storage e.g. evening

milk, pests–Transport

•Middlemen/women stranglehold (bogeyman?)

•Payment on quantity rather than quality

• Informal markets dominance thus low value addition

• Low products diversity• Low quality products• Inability to address

changing markets–urban poor–Urban rich

• No Supply guarantee- quantity , quality and price

• High costs (energy, packaging)

• Access to equipment• Product development

Policy should prioritize how to deliver better services and catalyze

innovations rather than focus on providing inputs

.

• ICTs addressing information asymmetry and knowledge gaps; iCow, Esoko, M-Farm

• Successful Farmers as consultants – a new line of business for medium sized farms

• Knowledge platforms e.g. KAAA

Innovations in services is starting to play a key role in farm level production

• Franchising model for inputs supply e.g. farmshop

• Inputs as a service model e.g. weed killers• Smart card to better target subsidies

Can we subsidize service as we do for

inputs and what business model will

have the desired impact

• Finance as part of an inputs package e.g. One acre fund

• Identifying key places to offer finance e.g. root capital model

• Insurance -Credit risk e.g. USAID, rainfall insurance

Knowledge

Financing models

Inputs

Farm mechanization

• Tractors for hire model being promoted by counties

• Rural fabricators can sell a service rather than selling equipment (key to success of Gari enterprises in Nigeria)

• Service oriented business models can play a key role in improving productivity₋ Poor farmers cannot

acquire capital equipment but can pay for a service

₋ Good entry point for youth in agriculture as service providers

FBOs should be the ideal vehicle for providing needed services to upgrade chains, however we are yet to come up with governance models that work

Source: field survey 2014

O

2.2 5.6 6.7 7.813.3 14.4

23.3 26.7

6.314.1

18.8

60.9

Advantages of Millet cooperative

Challenges of Millet cooperative

Mashinani is an interesting model of FBO who different

members offer different services

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FinancingFinancing

PHL prevention servicesPHL prevention services

Input servicesInput services

Potential for creating a moving traders to

become logistics and knowledge providers

Traders/middlemen provide perhaps the most dynamic entry point for service based interventions

Knowledge transferKnowledge transfer

•More likely to be trusted by farmers as perceived to have better knowledge of market of what to grow and when. In Benin the success of Nerica was due to efforts of one trader

How to catalyze the consolidation of the

trading sector without creating monopolies

• Intimate knowledge from repeated interaction mans middlemen have better understanding of credit worthiness of various farmers. In Ghana some middlemen (market women) pre-finance farmers.

• Trader can use same infrastructure to buy and supply input e.g. Pwani feeds

- Can be instrumental in improving quality e.g. offering drying services or support

- Warehousing services, commodity exchanges

Services can help build trust needed to make contracting model work

Farmer

When farmers engage with processors as buyers and sellers, a deeper relationship is established.

More importantly this intimate relationship provides

opportunitiess to provide extension services and inputs to

improve quality and also increase demand

Processor

Crop

Livestock

Food products

Animal feeds

• Poor farmers are risk averse and thus not likely to invest in expensive inputs.

• Diversifying incomes is one way of reducing risk. When processors help farmers diversify risk, they increase their supply e.g. Numa feeds with millet farmers in Uganda

Sell animal feeds

Buy crop

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Diversifying incomes is key to lowering

farmers risk aversion and thus technology

uptake

Rural processors and urban based SMEs processors can complement each other through a service model

Challenges • Meeting food and

product standards due low level of knowledge

• Product development and packaging

• Knowledge of urban and export markets

Artisanal processor

Artisanal processor can become a contract

manufacturer for SME processors. SMEs does product development

packaging and marketing e.g. Model used by St Bassa

Processors in Ghana

Strengths• Sourcing raw

materials (many time they are owned by farmer groups

Challenges • Steady supply of raw

material

Strengths• Identifying markets

and developing products development

• Navigating regulatory space

SME processor

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Can supermarkets be incentivized to develop

support emerging cottage industry to become

contract manufacturers

Consultancy services

Supply bulk product

Markets should drive value chain

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Can traditional cereals with their poor image

capture urban markets?Yes ! It is about product

development and marketing

What does the market want?

• Image building should be a big part of value chain development (Senegal farmers increased production by 30% after advertising campaign of local price

• R&D is the other side of the coin. Cassava resilience in West Africa demonstrates the power of innovation

Where is the market?

• How are diets are diets shaped?• New emerging urban markets:– Urban poor want convenience

and cheap food– Urban middle class want

convenient and healthy food

• Kenya has an extensive regional supermarket network creating a natural regional markets

• Urban markets now dominate 50% of all agricultural products but how to tap the market

Millet is preferred to other grains due to perceived higher nutrition , however awareness and availability of millet products is very low.

Millet products awareness (%)

Grains preference (% expressing) Reason for Millet preference (% expressing)

Affordability taste Availability Nutrition

11.5

19.824.4

44.3

Other starchy grains Millet

40.2

59.8

Pop millet

Millet rice

Beer

Millet cookies

Biscuits

Bread

Flour

1%

3%

6%

8%

10%

26%

97% • Flour is the millet product mostly known and is mainly used for porridge and ugali

• Narrow product range limits the market for millet

• Millet is preferred to other grains and more importantly preference due to nutrition underscoring the potential for development of high value products

Millet foods eaten (%)

Maandazi

cookies

Ugali

Porridge

1%

1%

52%

62%

Product innovation

• Gari has emerged as the defacto meal for the urban poor• Odorless fufu has penetrated middle class and diaspora

markets• Attieke is competing with rice of texture and convenience• HQFC now substituting wheat

What can cassava resilience in West Africa teach us?

Technology innovation

• Strong local fabrication capacity has delivered appropriate technologies for processing

• Innovative business models have technologies available to poor farmers

19611963

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19891991

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19971999

20012003

20052007

20090

100

200

300

400

500

600

700

800

Food Supply, Cassava Maize, Rice, Wheat West Africa

MaizeRiceWheatCassava

Food

Sup

ply

(kca

l/ca

pita

/day

)

How do we support emergence of an

innovative system that links research and

industry?JKUAT provides a

model

Agricultural transformation journey is yet to unfold

Artisanal processing

Industrial agro-processing

• Framer processing groups• Strong equipment

fabrication sector• Gender friendly machines• Business model to support

access to technology

SMEs and Cottage industry processing

What will it take?• Markets and product

development• Capacity to navigate

regulatory framework• Business support services• Access to modern food

processing equipment

• Strong supply chains that can guarantee sufficient capacity utilization

• Well develop consumer markets e.g. supermarkets

• Supportive industrial policy

Energy, infrastructure and finance, managerial

skills and R&D are a prerequisite to success

in processing

A Multi-pronged Approach is Needed

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Questions• What should be subsidized? production vs processing

vs research vs market channels Vs promotion• What is the role of policy (government)?- How should food policy look like? - How to harmonize industrial policy and agricultural

policy- How do we align budgeting process so that it supports

emergence of strong value chains

Incentives Mandates PPPs• Local content laws e.g.

5% sorghum bread• Need to be sure that

undue burden is not put processors.

• Tax breaks to upgrade equipment and encourage local content use

• Subsidies or a fund to support R&D for new products e.g. Nigeria Cassava Bread Fund

• PPPs can be used to attract investors e.g. Nissin factory in JKUAT

• PPPs need service sectors that can deliver very high levels of services

How do we support the emergence of a strong service sector able to

catalyst the upgrading of agricultural value chains

Questions

14

Be

15

Production structure

Marketing and distribution

Logistics Processing

Finance is the lifeblood pf the

whole value chain and new models are being tried e.g. root

capital

Innovations/New models/

•Contract farming

•ICTs e.g. i-Cow

•Inputs model Franchising

e.g. Farmshop Inputs as a

service

•Use of drones to curb quelea birds

•New FBOs (farmers within specialize)

•Warehouse receipt system

•Artisanal + SME symbiotic relationship

•Dual role processors (buyer of farmers output + selling inputs to farmers creating dense relationships)

•Branding and differentiation (sorghum and millet as superfoods)

Innovations providing many opportunities for upgrading value chains

•School milk program. But why not dairy products e.g. cheese and yoghurts

•PPPs .g. Ehiopia with Chinese sho company

•Empowered middlemen who provide a variety of services (logistics)

Market and trade policy can have important impacts

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Trade and competition policy are important tools but should be very

well targeted

• Farm gate price increase are fairly modest except for poultry. This is because most markets are local and already highly competitive

• International prices have important impact on farm gate prices implying that trade policy is a potential powerful tool

• Also note that there can be huge complementarities as combined effect tends to be larger than sum of impact

Agricultural product

Impact of market change on farm-gate price (%)

Perfect Competition

International Price (10% rise)

Combined (PC+IP)

Dairy -4.8% 3.67% -0.12%Poultry 20.18% 27.82% 60.18%Sorghum -1.24% 4.98% 4.14%Millet -3.49% 5.86% 4.20%

Partial simulation results (Impact of market structure and trade policy)

Questions

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Cassava• An important staple for food security (8% of

total agriculture output)• Being investigated as potential feedstock for

beer industry and as a substitute in the food-processing industry

Dairy• The meat and milk sectors make up 23% of agricultural

output. • Can replicate Kenya's model and develop a successful dairy

industry• Big potential local demand (consumption is 40 liters per

person, compared to 145 for Kenya)

Rice• Increasing yield by 8% will close the country's rice deficit.

Potential to become a major export.• A substantial regional market, as the region is a net rice

importer (Kenya imports close to 300,000 MT)

Cotton• Important source of income and credit for farm inputs• Potential to close the edible-oil deficit• Can supply a growing textile industry in Kenya and the local

and regional animal feed industries