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The East African : Aug 29th 2015
44 The EastAfrican BUSINESS AUGUST 29 - SEPTEMBER 4, 2015 EA still a niche ma≥ket fo≥ ga≥ment make≥s By KENNEDY SENELWA Special Correspondent THOUGH EAST Africa’s garment manufacturing potential is hindered by poor infrastructure and cumbersome Customs processes, exports are expected to grow as Kenya, Ethiopia, Tanzania and Uganda attract more investment. According to consulting firm McKinsey, East Africa will remain a niche market for garment makers over the next decade but its success will depend on the existence of free trade agreements with the US and the European Union. With $700 million in annual Grain farmers lack improved storage facilities, which affects the quality of their produce and, ultimately, their returns. Picture: File A mode≥nised g≥ain t≥ade, empowe≥ed small fa≥me≥s economy. Smallholder farmers also contribute the largest percentage of the food that most East African citizens consume every day. Maize, for instance, is a sta- S ple grain in Kenya; an average Kenyan consumes 98 kilogrammes of maize annually. Each East African govern- ment should put the interests of its smallholder grain farmers at the centre of regional integration efforts but instead, grain farmers still have limited access to markets, technology, and information. Grain farmers are forced to deal with high risks and accept the prices they are offered at the farm gate without adequate information; they lack proper quality assurance during transportation; they lack improved storage facilities — which affects the quality of their produce and, ultimately, their returns. Farmers speak about unpre- dictable weather conditions, unscrupulous middlemen, high transport costs, poor warehousing infrastructure, and a lack of access to finance and insurance as factors that lock them in a circle of poverty. Because it is a circle, the costs are transferred to the customers or consumers who pay higher prices for grain commodities. For example, maize prices in Kenya are among the highest in sub-Saharan Africa and Kenyan consumers just have to deal with it. Again, the result of the shortcomings in the grain value chain is inadequate in- mallholder farming, milling, trading and processing form the lifeblood of the African COMMENTARY GERALD MASILA “Grain millers are guaranteed quality grains and are able to use the safely stored grain as collateral to access credit.” vestment in the sector, which act as a break on development and eventually widespread food insecurity. New partnerships With governments shifting from being subsidisers and providers to enablers, new partnerships are being formed between governments, the private sector and civil society, to provide inputs and extension services to farmers and link them to markets. One new innovative food trade financing model, called the G-Soko platform, was launched at the beginning of August in Nairobi, bringing together grain farmers, millers, traders and banks from across East Africa. Besides linking buyers to sellers of agricultural produce, through a network of certified warehouses, the G-Soko platform allows farmers to see the real grain prices in the country, then depending on whether they are pleased with these prices, they can choose to sell their grain or store it safely, awaiting what they consider favourable market prices. Grain millers using this platform are guaranteed quality grains, so have less or no hassle with the Kenya Bureau of Standards. They — like the traders — are able to use the safely stored grain as collateral to access credit. In the grain value chain, trad- ers are a key stakeholder. If, for example, they are using G-Soko, they will end up with access to the regional market. The G-Soko pilot programme in Kenya has engaged hundreds of small farmers, who have been loaned $3.5 million by five participating banks, and had 50,000 megatonnes of grain traded through the system. G-Soko’s aggregation centres and certified warehouses will store bulk goods, ensure quality, and provide storage and credit facilities. In Uganda, where such a system is already in place, bulk buyers of maize can visit one market centre, rather than travel to different markets to pick up small amounts, as is the case in Kenya and Tanzania. As this demonstrates, regional integration is crucial in attracting financing for staple food trade. The East African Community has developed 22 standards for staple grains across the region, which makes it easier for farmers to trade. Next, the establishment of commodity exchanges should be prioritised to attract private sector financing. East Africa has all the ingre- dients to become a global agriculture powerhouse. Now the private sector, governments, and farmers are coming together to create innovative solutions like G-Soko. With the support of the re- gion’s leaders, we can modernise and grow our agricultural sector while empowering small farmers, millers, and traders. Ge≥ald Masila is the executive di≥ecto≥ at Easte≥n Af≥ica G≥ain Council Kenya’s garment industry capacity in export processing zones has grown due to foreign direct investment. Pic: File exports over the next 10 years, East Africa will capture only a small slice of the global sourcing market but the industry’s impact will still be important for the region. Kenya, Ethiopia, Tanzania and Uganda account for 0.07 per cent of global exports, earning $337 million. East Africa may be a new alter- native for selected large players in basic categories with investment rising, leading annual exports to grow to $1 billion in five years and $1.7 billion annually in the next decade. “East Africa could move be- yond cut, make, and trim (CMT) facilities, but this process could take several years before significant numbers of vertically integrated, domestic players appear in the region,” said Saskia Hedrich, who is based in McKinsey Munich office. She said the industry base in the region will attract funds to upgrade facilities and skilled workers to become a major force in the apparel sector over the next decade. Duty-free access to the United States provided by Africa Growth and Opportunity Act (Agoa) is one of the drivers, but the region’s garment manufacturers are looking at the European Union to diversify markets. Global buyers’ preferences in- dicate real interest in Kenya and Ethiopia, according to consulting firm McKinsey & Company. McKinsey’s Nairobi office di- rector Bill Russo said Kenya and Ethiopia are encouraging the development of domestic textile and garment industries based on recent legislation in the two countries. “The two share strengths and weaknesses of nascent apparelsourcing countries. Infrastructure in both countries is a challenge with roads, rails and ports being challenging to navigate for many players,” he said. Power of Agoa The Kenyan apparel industry is driven almost exclusively by the duty-free access it enjoys to the US through the Agoa legislation that came into effect in 2001. Ninety-two per cent of garments exports in 2013 were delivered to the US. Achim Berg, a principal in McKinsey’s Frankfurt office, said Kenyan manufacturers perceive European buyers as more demanding in terms of quality, order sizes and adherence to lead times for delivery of orders. He said this presents a risk as Agoa in the past was on short renewal cycles. Loss of Agoa status will have detrimental impact on industry as a few of the existing suppliers in Kenya are considering expanding their EU customer base. Kenya’s garment industries ca- pacity in export processing zones has grown due to foreign direct investments in CMT factories by investors from Middle East and Asia. Dependency on US buyers has limited Kenya’s importance in the global sourcing market. “The remaining factories have grown into more efficient entities over the past 15 years, with around 1,500 employees on average today versus only around 560 in 2000,” said Mr Berg. Agoa has been less influential for Ethiopia despite the country’s inclusion in the Act in 2001. Activities accelerated after 2005 when the government formed industry and development partnerships with Turkey and Germany.
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