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Taking Ethiopia’s Competitiveness Forward with Agro-Industry parks

 

Taking Ethiopia’s Competitiveness Forward with Agro-Industry parks

Eshetu Hailemariam

02-13-16

This week the government made a major announcement. That is, four National Integrated Agro Industrial Parks worth 30 billion birr will be launched as of September 2016/17 in central east Oromia , south west Amhara, eastern SNNP , western Tigray.

It is a realization of the second Growth and Transformation Plan, that “7 million square meters land will be made available for investor engaged in manufacturing and related sectors, four pilot agro industry parks will be established which will be linked with millions of smallholders to supply inputs, regional administrations, cities and towns will get the necessary support to develop standardized industrial clusters and parks for those investors promoting from small to medium industries, and hence generate employment opportunities”.

Agriculture is believed to lead the speed and track of industrial development by generating capital sector and generating effective demand for industrial outputs. Since 1992, the govt has enforced a series of reform programs so as to rework the economy from command economy to promote a market economy, expedite the integration of the economy in the age of globalization and encourage the broader contribution of the private sector in the economic system. As a result, a good deal has been achieved in moving from an extremely centralized economy to a relatively liberal economic system.

Indeed, the development policies and techniques significantly acknowledge the requirement for remodeling the agriculture sector from its low-productivity standing and subsistence production orientation to a high productivity and market-oriented production. The main focus has been on attaining food security and earning of foreign currency through increasing medium and large industrial farms within the country additionally to the scaling up program.

Furthermore, the agricultural policy additionally acknowledges the key role private sector capital plays within the development of large-scale farms. To that end, the govt has created enabling conditions to encourage domestic and foreign investment. To accelerate the progress, the govt have invested heavily on infrastructure, rural finance, research, access to improved technology, market development, agricultural extension services, promotion of cooperatives and education programs, among others.

In line with that, the Second Growth and Transformation Plan (GTP II) envisages:

  • to register an annual growth of 29% in our export revenue
  • to make Agro-processing products and light manufacturing the main export revenue generating sectors
  • to achieve an annual growth of 24% in the manufacturing sector
  • to increase the contribution of the manufacturing sector to our export revenue to 25% from its current level of 10%.
  • to support regional states and cities to develop international standard industry parks

Indeed, the Agro-industrial processing works are vital given the high promises in the agriculture sector, it opens much wider room for investment. To increase production and productivity of agricultural sector, agricultural value chains are vital for the success of agrarian economies and to advance the incomes of rural populations and large-scale farms as well.

That is why the government decided to create Agro-processing industrial parks in Tigray, Amhara, Oromia and Southern Nations, Nationalities and Peoples’ states, with an estimated cost of of 2.5 billion US dollars. According to the concerned officials, about 17 agro-processing locations have been identified. Among these, four locations - Bahker in Tigray, Bure in Amhara, Ziway in Oromia, and Sidama in SNNP – are slated to be in the first round as their feasibility study has been completed. Indeed, researches have indicated the presence of plentiful livestock and fish, sesame, spices, and honey in the selected areas. Moreover, their closeness to port, major cities and necessary infrastructure will make them attractive to investors.

An industrial development zone is defined by the Investment Proclamation (Amendment) No 849/2014) as: “an area with distinct boundary designated by the appropriate organ to develop identical, similar or interrelated industries together or to develop multifaceted industries, based on a planned fulfillment of infrastructures and various services such as road, electric power, and water, and having special incentive schemes, with a broad view to achieving, planned and systemic development of industries, mitigation of the environmental pollution and development of urban centers, and includes special economic zones, industrial parks, technology parks, export processing zones, free trade zones, and the likes designated by the Investment Board.”

Industrial Park facilitates the creation of facilities which will be pooled by several firms located in the area. The benefits of pooled investment, access to technical information and tax exemptions, economic scale of operation and the setting up of essential services (such as power, water and wastes disposal) are evident.

Experiences of India, as documented by Agro-industrial parks: Experience from India; K. Laxminarayana Rao, shows that a well-designed agro-industrial park with all the requisite facilities have significant promises for marketable success.

By definition an ‘agro-industrial park’ focuses upon the processing required of ‘agricultural products’ and the mix of ‘non-agricultural’ industries may be low or non-existent. Of primary importance is access to a viable environs, where a range of productive agro-horticultural initiatives may exist. Management, information, transport, storage and packaging services can be pooled across a range of agro-industrial processing firms. There will also be prospects for reprocessing wastes and using subpar product of one processing system as the raw material for another.

Furthermore agro-industrial parks offer networks of exchanges between producers, markets and processors, but also offer the physical arrangement essential for transforming industries. In this is the role of the planner, public servant, professionals and the entrepreneur and those within the local finance industries that support them. Joint investment and industrial planning are central to issues of park construction and operation.

There are a number of distinct benefits with launching a dedicated agro-industrial park that will attract similar or complementary enterprises. Working in close vicinity provides for streamlining of management, of supervision, of services and of shared market utilization. The different initiatives are able to pool and exploit the complementarity of raw materials, utilities, information resources, transport, import-export arrangements, and similar co-ventures that comes from a cooperative and well-coordinated industrial estate supported by both local government and private businesses.

The concept of the agro-industrial park, with the setting up of common infrastructure and services that may be used by similar processing enterprises on site, provides potential to minimize expenditure and thus reduce both borrowings and risks to investors and industrialists. There are also issues of economic-scale involved with the provision of services and of plant for treatment and/or disposal or recycling of wastes. These may require a minimum throughput that would be prohibitive to provide economically by the many separate enterprises involved. An agro-industrial park may have a greater chance of becoming self-sustaining from the outset, with costs pooled across the many enterprises involved.

Ethiopia has the potential to trail the examples Vietnam and similar of developing countries which succeeded in creating millions of employment opportunities in the light manufacturing sub-sector by pulling similar advantages and by inviting leading investors. It can surely become globally competitive in large segments of light manufacturing, such as apparel, leather products, and agribusiness and, if successful, could create millions of employment opportunities in the process by leveraging its labor cost advantage, that is low wages combined with high labor productivity in good-practice firms, and comparative advantage in the natural resource industries, such as agriculture, livestock, and forestry).

Ethiopia has many natural resources that can provide valuable inputs for light manufacturing industries serving both domestic and export markets. Among its abundant resources are cattle, which can be processed into leather and its products; forests, which can be managed for the furniture industry; cotton, which can support the garments industry; and agricultural land and lakes, which can provide inputs for agro-processing industries. Ethiopia has abundant low-cost labor, which gives it a comparative advantage in less-skilled, labor-intensive sectors such as light manufacturing.

Unfortunately, the agro-industry potential has been untapped due to interrelated problems. The shortage and low quality of inputs is often blamed for the failure to penetrate reliable markets in Agro related sub-sectors. However, it is equally true that there is scarcity of processing firms in areas where there are abundant agricultural products. On the reverse, in places where industries are found, dearth of raw materials has resulted in low income.

The agro-processing parks would go a long way in solving and tackling the lack of value chain and will add value to agricultural products destined for export. Feasibility studies indicated that there is abundant raw materials in the identified areas and given they would be attractive to investors given their proximity to port, towns and infrastructure.

Each of the industrial parks will have initially up to eight rural transformation centers that would serve as pre-processing sites. The parks will incorporate companies engaged in exporting value-added agricultural products to the world market. The parks will go online next year, after the study conducted to select areas with large agriculture production. The integrated agro industry parks are set to be established at coffee, sugar, sesame seed, fruit and vegetable production sites.

Given the ready availability of the technology and skills, the potential to boost the linkage to the next level of manufacturing is even greater. for example, to the sub-sector manufacturing garments, there is obvious potential for domestic firms to increase their share in the domestic and global clothing markets. A significant and growing labor cost advantage, access to a state-of-the-art and well-located container port in Djibouti, and duty-free access to the U.S. and EU markets offer Ethiopia the opportunity to expand its apparel industry. Foreign direct investment can accelerate the process of ramping up production and exports.

Ethiopia’s potential for expanding its production of high-quality cotton enhances the potential benefits associated with expanded production of clothing. The binding constraint on Ethiopia’s competitiveness in apparel has been poor trade logistics, which wipe out its labor cost advantage and cut it off from the higher-value, time-sensitive segments of the market. Establishing a green channel for apparel at customs, reducing the cost of transportation by improving infrastructure, and setting up an industrial zones would resolve the most important trade logistics issues.

Ethiopia has even greater potential in leather, which is more labor intensive than apparel. Italian shoe importers express the highest regard for Ethiopian leather. Modest, targeted reforms could enable Ethiopia’s large animal herds to produce vast amounts of some of the best leather in the world. Furthermore, the penalty of poor trade logistics is less serious because leather products are less time sensitive than apparel. The immediate constraint is limited access to high-quality processed leather.

Indeed, the Textiles and Garments subsector is one of the best demonstrations of the industrialization stride and the success of the policy as it became to receive substantial interest from key global textile companies. Even if the textiles sector have a rich history in Ethiopia stretching back thousands of years, its industrial scale production dates back less than a century, and until a decade ago it remained highly uncompetitive and limited to a small portion of the domestic market.

Following the accomplishments of the first Growth and Transformation Plan, however, the sector started to undergo fundamental structural change and now set to make Ethiopia an important hub for the industry. In sharp contrast to its lukewarm performance a decade ago, the industry is now showing promising export revenue, of nearly US$100 million. 

This highflying performance of the textile and garment sector is a result of continuous improvement in the production capabilities of domestic textile, garment, knitting and weaving firms; more importantly, there has also been the performance of foreign firms which have recently entered the industry. The government’s efforts to attract foreign investment into the sector have been successful in not only establishing a first round of established international textile and garment firms but also providing a strong demonstration effect, placing the country as an emerging textile powerhouse on the global industry map. There are a number of reasons to explain the choice of Ethiopia as an investment destination for international textile and garment companies, but the most relevant are its comparative advantages in terms of production factors and the policies put in place by the Ethiopian government.

One of the showcases of the textile sectors progress is the announcement of Ayka Addis Textile & Investment Group, a subsidiary of Istanbul-based Ayka Textile, its plan to invest one billion Ethiopian birr (31 million pounds) in an expansion of its current RMG production unit in Alem Gena, 19 kilometers away from Addis Ababa. The expansion will create an additional 13,000 jobs, thus tripling employment, and take production capacity up to 100 percent. The company is also expecting exports to triple to 150 million US dollars by the end of 2015 from which was 56 million US dollars in 2012/13.

Another example is the decision of the textile industry giant Tesco and H&M to start producing in Ethiopia. Last year, the clothing megabrand H&M announced it was looking to source clothes from Ethiopia. H&M plans to source a million garments a month from Ethiopia. Immediately, it started training of employees and became engaged in working hour management, quality of products, and growth in productivity, as well as environmental protection".

In general, the growing demand for Ethiopian textiles and garments in Western markets can be seen in the fact that more than 45 percent of the national production is exported to Germany. Moreover, according to the Ethiopian Textile Industries Development Institute (ETIDI), thirteen new additional factories with a combined production capacity of 100 tons a day are expected to start production until the end of 2015.

Another area of potentially linked to the promotion of agro-industry parks is the leather and leather products subsector which registered high growth in export revenue year after year. Even if Ethiopia possesses the largest livestock herd in Africa, and the 10th largest in the world and it annually produces 2.7 million hides, 8.1 million sheepskins and 7.5 million goatskins, the sector underperformed for centuries. Therefore, despite the leather industry's potential to become a world-class supplier of high quality finished leather and leather products, including shoes, garments, gloves and accessories, little achieved for long.

The main leather-related export item of Ethiopia is, however, low value-added hides and skins. The Government of Ethiopia has been promoting to shift the major export items from the low value-added hides/skins to high value-added finished leather. The leather industry has been one of the major traditional industries together with the coffee and garment industries, but it is now at a turning point to change itself from a traditional industry to a modern industry to penetrate the international high value-added leather market, under the strong initiative of the government.

The government of Ethiopia has made the leather and leather products value chain among the top four priority industries in the country due to its strong backward linkages to the rural economy aiding in the alleviation of poverty and its potential for increasing exports and hence the flow of foreign currency into the economy.

The leather footwear industry is considered at important sub-sector that leads the whole sector’s modernization. Although the export of leather footwear started only in 2005, the export value has been growing steadily since then and is expected to make a big impact on the Ethiopian economy.

The importance of the leather footwear industry as a part of the leather industry has been emphasized by the GOE at various levels. In the PASDEP (Plan for Accelerated and Sustained Development to End Poverty), the leather industry was mentioned as an important sector for trade and industry development. 

The development of the leather industry is in line with the Agricultural Development Led Industrialization (ADLI), which is the basic development strategy of the country, in that the promotion of high value-added leather products is going to encourage the process of the industrialization of agriculture.

In the first Growth and Transformation Plan (2011-2015), the Government has made the footwear industry one of its focus areas, since it is one of the most labor-intensive industries, providing ample employment opportunities, a key to successful industrial development.

As a result, Ethiopian leather products are now being exported in large volumes to markets in Europe, especially Italy and the UK, America, Canada, China, Japan and other Far Eastern countries, the Middle East and other African countries including Nigeria and Uganda. Ethiopia is indeed making a name for itself in the world of mass-produced footwear.

Moreover, foreign investors are now showing increased interest in Ethiopia’s potential. Ethiopia has recently become an increasingly important destination for international buyers looking for high-end shoes, because of its fine leather products and a strong commitment to quality. The footwear industry in Ethiopia is thriving. There have been a growing number of new and innovative enterprises, as well as expansion of existing companies, improving the quality of their products and developing new marketing systems. In the face of fierce competition Ethiopian entrepreneurs have been introducing new ideas for product design, production methods, labor management, procurement, and marketing.

Foreign Direct Investment was increasingly attracted due to government policies. Besides the excise breaks, tax holidays and cheap land rental offered to investors in certain preferred sectors make Ethiopia attractive. Ethiopia‘s has the added advantage of a competitive and youthful workforce.

International retailers have been showing interest in opening new factories in Ethiopia or exporting footwear from Ethiopian leather factories such as Tikur Abay, Peacock, Anbessa and Ramsey. Huajian, a Chinese shoe maker, opened a factory in 2012 in Ethiopia employing over 3000 people and currently produces shoes for Guess, Tommy Hilfiger, Naturalizer, and other Western brands at its Dukem factory. Another shoe factory established in Bole Lemi Industrial Zone, the George Shoe Corporation, is now offering its first 10,000 pairs of shoes for the international market.

As the Government Communication Affairs Office stated:

The intervention will eventually help the nation export value-added commodities thereby boosting its global competitiveness. It will also help ensure market access and create hundreds of thousands of jobs thereby greatly changing the livelihoods of citizens.

All concerned organs as well as the public is expected to harmonize efforts towards the realization of the planned agro industry parks.


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