© Global Development Solutions, LLC – All Rights Reserved An Overview of the Integrated Value Chain Analysis Of Selected Strategic Sectors The Government of Ethiopia and The World Bank Group Addis Ababa, Ethiopia 23 May 2006 Presented by Global Development Solutions, LLC

© Global Development Solutions, LLC – All Rights Reserved Sectors Presented 1.Cut Flowers (Roses) 2.Cotton-to-Garments (Polo Shirt) 3.Skins-to-Leather Shoe 4.Housing/Road Construction

© Global Development Solutions, LLC – All Rights Reserved Value Chain Analysis for Cut Flowers (Roses)

© Global Development Solutions, LLC – All Rights Reserved Market Opportunities and Characteristics Fierce Competition with downward price trends Stricter breeders rights as well as environmental and social codes of conduct increasingly important In some countries, such as the UK, increased importance of supermarket (direct sales) distribution channels Cut FlowersRoses Ethiopian Exports (Roses):$10 million (2005) Global Demand (Cut flowers/buds)$12.3 billion (2005)

© Global Development Solutions, LLC – All Rights Reserved Key Findings from the Value Chain Analysis Farming with self propagated material or in hydroponics media both provides superior cost competitiveness via reduced plant material cost and higher yields Cut FlowersRoses Farmin g 24.1% Post- Harvest Handling 1.5% Transport & Marketin g 74.4% Farm-to-Market Value Chain for Hydroponics-Grown Roses Farm-to-Market Value Chain for Soil-Grown Roses Farmin g 24.8% Post- Harvest Handling 1.7% Transport & Marketin g 73.5% US$255,683/ha US$0.155/stem 1.65 mil stems/ha US$294,190/ha US$0.150/stem 2.1 mil stems/ha Insufficient coverage of cargo flights exacerbates the already high portion of transportation and marketing cost in the total farm to market value chain

© Global Development Solutions, LLC – All Rights Reserved Cut FlowersRoses

© Global Development Solutions, LLC – All Rights Reserved Cut FlowersRoses Source: Global Development Solutions, LLC TM Flower Producer Imported Inputs Cut Flower Supply Chain for Ethiopia Local Inputs Imported Input Traders Export Market Dutch Auctions Cargo Export Market Other Passenger Cargo 2/31/3 Freight Forwarding Services Cold Storage On-site inspection and customs (MoA, Customs Inspectors) Refrigerated Truck Airport Airlines (EA, KLM, Lufthansa)

© Global Development Solutions, LLC – All Rights Reserved Cut FlowersRoses Hydroponics vs. Soil Production

© Global Development Solutions, LLC – All Rights Reserved Cut FlowersRoses Benchmarking Key Characteristics of Rose Production in Ethiopia

© Global Development Solutions, LLC – All Rights Reserved Key Constraints and Challenges Cut FlowersRoses Poor clearinghouse services Undeveloped network of supporting service providers, especially in the area of insurance and freight forwarding/clearing Nonexistent research and development, at business and public sector level Increased diversification away from direct sales towards Dutch Auctions

© Global Development Solutions, LLC – All Rights Reserved Actions/Way Forward Increase usage of hydroponics growing medium Increase self-propagation of plant material Increase usage of support services rather than do all marketing by themselves Do not entirely diversify away from direct sales Firm Level Industry Level Establish Codes of Conduct Create captive cost-minimizing supply chain structures for fertilizer and other inputs Create industry level linkages with the support industries such as insurance and freight forwarding Create partnerships with the public sector to intensify research and development Cut FlowersRoses

© Global Development Solutions, LLC – All Rights Reserved Actions/Way Forward Establish a working system of breeders right protection with eventual membership in the UPOV - gain observers status in UPOV as an intermediary step; Establish clearing house facilities at airport and increase cargo freight fleet by Ethiopian Airlines; and Increase spending in research and development. Public Sector Cut FlowersRoses

© Global Development Solutions, LLC – All Rights Reserved Value Chain Analysis for Cotton-to-Garments

© Global Development Solutions, LLC – All Rights Reserved Cotton to Garments Polo Shirt Market Opportunities and Characteristics Ethiopian Exports (Textiles/Garments): $3.6 million (2005) Global Demand: $183 billion (2005) China: 60% of US Market AGOA:1.3 billion sme (only 11.7% quota filled) Multiple fashion trends in one season, mass customization and shortened lead times Increased leverage and market power of large retailers who can and do downward price pressures on suppliers Quota removal has removed competitiveness from suppliers relying on quota preferences for market access AGOA window of opportunity narrowing: proliferation of AGOA- type preferential treatment on the part of the USA extended to many countries. Chinese temporarily withdrawal from knit shirt and cotton trouser market, key segment of African apparel exporters

© Global Development Solutions, LLC – All Rights Reserved Cotton to Garments Polo Shirt

© Global Development Solutions, LLC – All Rights Reserved Cotton to Garments Polo Shirt Diagram XXX: Value Chain for Exported Polo Shirt, Private Firm, Ethiopia

© Global Development Solutions, LLC – All Rights Reserved Cotton to Garments Polo Shirt Key Findings from the Value Chain Analysis : An Example of Polo Shirt Production Lack of transparent cost accounting (SOE) Poor labor skills Excise duty on fabrics hamper competitiveness High cotton fabric waste (SOE)

© Global Development Solutions, LLC – All Rights Reserved Poor Labor Productivity Cotton to Garments Polo Shirt

© Global Development Solutions, LLC – All Rights Reserved Cotton to Garments Polo Shirt

© Global Development Solutions, LLC – All Rights Reserved Cotton to Garments Polo Shirt Room for Improving Lint-to-Yarn Conversion Ratio

© Global Development Solutions, LLC – All Rights Reserved Cotton to Garments Polo Shirt High Cost of Ginning

© Global Development Solutions, LLC – All Rights Reserved Cotton to Garments Polo Shirt Irrigation – Key to Competitive Cotton Production

© Global Development Solutions, LLC – All Rights Reserved Cotton to Garments Polo Shirt Need for Improving Farming Practice

© Global Development Solutions, LLC – All Rights Reserved Key Constraints and Challenges Poor training know-how and non-existent institutional support in the area of skills improvement; Counterproductive Government taxation in the form of VAT and excise duty; Inefficient and wasteful public textile companies unable to supply sufficient quality and quantity of fabric for garment exporters; Cotton lint production dominated by large scale companies with no access to irrigation (private companies) and thus have low cotton yields; and Large scale farms with access to irrigation (mostly SOEs) are challenged by an overburdened administrative overhead cost structure. Cotton to Garments Polo Shirt

© Global Development Solutions, LLC – All Rights Reserved Actions/Way Forward – Garments and Textiles Improve productivity training; and Reduce waste on the part of SOEs both at fabric and textile level. Firm Level Industry Level Create research and training centers; and Pool resources for marketing efforts abroad. Privatize textile assets; Remove or reduce excise duty on textiles; and Expedite VAT refunds. Public Sector Cotton to Garments Polo Shirt

© Global Development Solutions, LLC – All Rights Reserved Actions/Way Forward – Cotton Improve farm management and remove OH redundancies at both farms and ginneries; Invest in seed production; and Maintain high GOT levels. Firm Level Industry Level Develop market linkage mechanisms to help link the most productive farms (usually irrigated farms) with the most efficient ginners Public Sector Extend the irrigation network; Establish and enforce rules for chemical usage at farm level; Increase spending on cotton research; and Stimulate seed sector. Cotton to Garments Polo Shirt

© Global Development Solutions, LLC – All Rights Reserved Value Chain Analysis for Skins-to-Leather Shoes

© Global Development Solutions, LLC – All Rights Reserved Leather Shoes Market Opportunities and Characteristics Fresh Sheepskin Production Africa (Total):154,285 MT (8.6% of World Production) Ethiopia: 10,0800 MT Ethiopias Export of Dried Salted Skins:2,888 MT (73.2% of African exports) (6.6% of Global exports)

© Global Development Solutions, LLC – All Rights Reserved Leather Shoes Raw Sheepskin Supply Chain in Ethiopia: High Waste and Damage

© Global Development Solutions, LLC – All Rights Reserved Leather Shoes Declining Share of Grade 1-3 and 4 Skins Poor Quality of Skins

© Global Development Solutions, LLC – All Rights Reserved Leather Shoes High Cost of Wet Blue Production

© Global Development Solutions, LLC – All Rights Reserved Leather Shoes High Opportunity Cost of Ekek

© Global Development Solutions, LLC – All Rights Reserved Leather Shoes Market Opportunities and Characteristics for Leather Shoes EU Demand for Shoes:61.8 billion Sourcing from Developing Countries:24% - 53% Italy (Largest EU Consumer):395.3 million pairs/year Ethiopian Production Formal Sector:1.9 million pairs/year Informal Sector:3.5 million pairs/year Low capacity to respond to international orders both in quantity and time; Poor finishing due to lack of skilled labor and appropriate technology; Slow responsiveness to change shoe models; High production costs; and Lack of marketing skills.

© Global Development Solutions, LLC – All Rights Reserved Key Findings from the Value Chain Analysis Leather Shoes High cost of raw material (Birr 79.77/pair) High wastage of material during cutting (15%) High cost of material for lasting and finishing (27.6% of shoe manufacturing)

© Global Development Solutions, LLC – All Rights Reserved Leather Shoes Poor Labor Productivity High Assembly Costs

© Global Development Solutions, LLC – All Rights Reserved Key Constraints and Challenges Raw sheepskin Ekek attack(almost 80%of sheepskin from highland Ethiopia) ; Unorganized supply chain in raw sheepskin; Per piece pricing does not reward quality; Poor slaughtering and post slaughter handling; and Low awareness for quality of sheepskin along the entire supply chain. Leather Overall shortage of sheepskin and under capacity operation (48%) and High cost of input raw sheepskin (60% of production cost); Defect of raw sheepskin (80% Ekek, 10%lack of preservation, and 10% lack of proper handling): and Shortage of skilled workers. Shoes High cost of raw material (upper shoe leather 90% of cost); Lack of skilled labor and inflexible technology to respond to market; Dumping of low price and low quality shoes from China; and Low capacity utilization of shoe producers (56%). Leather Shoes

© Global Development Solutions, LLC – All Rights Reserved Actions/Way Forward Install and strengthen the finishing lines in the tanneries; Conduct training of workers; and Improve environmental performance. Firm Level Industry Level Establish a quality-based pricing system for sheepskin; Assist improvement and expansion of slaughter houses and raw sheepskin storage; Form Public-Private Partnerships to eradicate Ekek; Arrange supply of semi-finished skin to tanneries that process finished leather so that shortage is avoided and prices normalized. Leather Shoes

© Global Development Solutions, LLC – All Rights Reserved Actions/Way Forward (Cont) Take immediate action on ekek control and eradication; Strengthen and expand extension services on skin and hide; Give incentive to tanneries that process sheepskin to finished leather; Strengthen LLPT1 as a center of excellence that provides training and conduct R&D to support tanneries; Encourage export of meat and suppress export of live animals; Encourage investment in animal husbandry farms; Expand modern slaughterhouses; and Expand veterinary services. Public Sector

© Global Development Solutions, LLC – All Rights Reserved Value Chain Analysis for Housing and Construction

© Global Development Solutions, LLC – All Rights Reserved Housing & Road Construction Housing: Profile Building Height:Ground + 6 floors Total Building Area:Multi-family apartment (24 units) m² Site Work:850 m² of asphalt pavement Engineering Estimates

© Global Development Solutions, LLC – All Rights Reserved Housing & Road Construction Housing Construction Value Chain Construction Phase

© Global Development Solutions, LLC – All Rights Reserved Housing & Road Construction

© Global Development Solutions, LLC – All Rights Reserved Housing & Road Construction High Cost of Input Material

© Global Development Solutions, LLC – All Rights Reserved Housing & Road Construction

© Global Development Solutions, LLC – All Rights Reserved Housing & Road Construction Low Road Density

© Global Development Solutions, LLC – All Rights Reserved Key Findings from the Value Chain Analysis (Road) The bulk of the value added comes from construction of the road (90% of the total cost of road construction); The highest cost of construction for base-course (constitutes 48% of road construction work ); Quarry rock production activity is the highest (33% of base course cost) during the base-course phase due to high cost of equipment (constitutes 49.37%) Housing & Road Construction

© Global Development Solutions, LLC – All Rights Reserved Housing & Road Construction High Equipment Input Requirement

© Global Development Solutions, LLC – All Rights Reserved Housing & Road Construction High Cost of Equipment Rental and Finance

© Global Development Solutions, LLC – All Rights Reserved Key Constraints and Challenges Housing Unavailability of adequate standards and norms; Limited design checking/review and approval procedures; Lack of IT know-how and training; Lack of Standard Contract Documents; Shortage of construction material; Shortage of construction machinery; Scarcity of finance and lack of management skill; and Lack of Building Code. Road Shortage of equipment rental company and high rental cost; Limited access to Finance; Shortage of qualified national engineers and technicians; Lengthy dispute settlement mechanism and lengthy judiciary process; Bureaucratic and lengthy bid analysis practices; and Absence of proper mechanism for addressing material cost escalation. Housing & Road Construction

© Global Development Solutions, LLC – All Rights Reserved Actions/Way Forward Facilitate and provide proper training and capacity building programs to overcome the shortage of skilled human resource to deliver efficient services; and Applying the use of contemporary IT software and equipment. Firm Level Industry Level Introduce a mechanism whereby design fees reflect industry wide quality standards; and Implement industry-wide Code of Conduct and certification program to ensure a quality rather than price driven project bidding process. Housing & Road Construction

© Global Development Solutions, LLC – All Rights Reserved Introducing land policy reforms; Creating favorable loan provisions by banks; Upgrade skills of City Administrations and regional bureaus staff; Reduce prevailing government ownership and control over sales and distribution of major inputs for construction materials such as cement; and Implementing Building Standard Code. Public Sector Actions/Way Forward (Cont.)

© Global Development Solutions, LLC – All Rights Reserved An Overview of the Integrated Value Chain Analysis Of Selected Strategic Sectors The Government of Ethiopia and The World Bank Group Addis Ababa, Ethiopia 23 May 2006 Presented by Global Development Solutions, LLC