integrated value chain analysis™

© Global Development Solutions, LLC™ – All Rights Reserved

An Overview of theIntegrated Value Chain Analysis™

Of Selected Strategic Sectors

The Government of Ethiopiaand

The World Bank Group

Addis Ababa, Ethiopia23 May 2006

Presented byGlobal Development Solutions, LLC™

www.GDS-LLC.com


Sectors Presented

1. Cut Flowers (Roses)

2. Cotton-to-Garments

(Polo Shirt)

3. Skins-to-Leather Shoe

4. Housing/Road

Construction


Value Chain Analysis for

Cut Flowers (Roses)


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 Flowers Roses

Ethiopian Exports (Roses): $10 million (2005)Global Demand (Cut flowers/buds) $12.3 billion (2005)

Table XXX: Major World Importers and Exporters of Cut Flowers, 2005 (US$ million) Imports Exports

Top 5 Importers Trade Value Global Share

Top 5 Exporters Trade Value Global Share

UK 1,928 18% Netherlands 5,869 58% Germany 1,910 18% Colombia 1,385 14% USA 1,655 16% Ecuador 637 6% France 989 9% Kenya 407 4% Netherlands 975 9% Israel 276 3% Total Imports 10,517 100% Total Imports 10,115 100% Source: UN Comtrade, SITC Rev.3, 2005.


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 Flowers Roses

Farming

24.1%

Post-Harvest Handling 1.5%

Transport & Marketing 74.4%

Farm-to-Market Value Chain for Hydroponics-Grown Roses

Farm-to-Market Value Chain for Soil-Grown Roses

Farming

24.8%

Post-Harvest Handling 1.7%

Transport & Marketing 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


Cut Flowers Roses

Trans port to Market 65.7%

Docu ment 0.9%

Inspection in Holland 2.3%

Unpacking 12.9%

Trolley/ Buckets 5.3%

Auction Charges 12.9%

Diagram XXX: Value Chain for Rose Transport & Marketing to Holland

Transport Cost: B irr 1,615,443 (US$187,842/ha) B irr 1.28/stem (US$0.11/stem)

Table XXX: Airfreight rates and Frequency, Addis Ababa to Europe, January 2006 Passenger Cargo Rate

(US$/kg) Frequency/Day of

Week Rate

(US$/kg) Frequency/November-

May Ethiopian A irlines (to Amsterdam)

$1.5 0 T , Sa

KLM (to Amsterdam)

$2.05 T, W, F, S

Lufthansa (to Frankfurt)

$2.05 M,W, F

None

DAS Air $1.4 Daily

Global Development Solutions, LLC


Cut Flowers Roses

Source: Global Development Solutions, LLCTM

Flower Producer Imported Inputs

Cut Flower Supply Chain for Ethiopia

Local Inputs

Imported Input Traders

Export MarketDutch Auctions

Cargo

Export MarketOther

PassengerCargo

2/3 1/3

Freight Forwarding Services

Cold Storage

On-site inspection and customs (MoA, Customs Inspectors)

Refrigerated Truck

Airport

Airlines(EA, KLM, Lufthansa)


Cut Flowers Roses

Table XXX: Contrast of Different Types of Rose Farming on Final Cost of Roses per Stem

Soil With Imported Plant Material

Hydroponics with Imported Plant

Material

Hydroponics with Self-propagated Plant Material

Number of Farms* 27/27 4/27 1/27 Production (farming) cost/ha

$63,334 $70,812 $67,245

Initial land establishment cost/ha

$3,488 $34,883 $34,883

Planting material cost/ha

$21,600 $21,600 $18,000

Marketable stems/ha 1,651,000 1,960,000 1,960,000 Farming cost/stem US¢3.84 US¢3.61 US¢3.43 Farm-to-market cost/stem

US¢15.48 US¢15.01 US¢14.82

Sales price/stem US¢18.3 US¢18.3 US¢18.3 Source: Global Development Solutions, LLC * Currently there are 27 farms operating in this sector.

Hydroponics vs. Soil Production


Cut Flowers Roses

Ethiopia* Kenya*Production (farming) cost/ha $63,334 $81,134 Plants/ha 65,000 80,000Stems/ha 1,685,000 2,300,000Loss rates 2% 5%Marketable stems/ha 1,651,000 2,180,000Farming cost/stem US¢3.84 US¢3.50Farm-to-market cost/stem US¢15.5 US¢12.1Sales price/stem US¢18.3 US¢14.4% margin 18.10% 13.90%

Table XXX: Benchmarking Key Characteristics of SME Rose Growers in Ethiopia and Kenya

* The data refers to running costs only, excluding setup costs.Source: Global Development Solutions, LLC™

Benchmarking Key Characteristics of Rose Production in Ethiopia


Key Constraints and Challenges

Cut Flowers Roses

• 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


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 Flowers Roses


Actions/Way Forward

• Establish a working system of breeders’ right protection with eventual membership in the UPOV - gain observer’s 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 Flowers Roses



Cotton-to-Garments


Cotton to Garments

Polo Shirt


Ethiopian Exports (Textiles/Garments): $3.6 million (2005)Global Demand: $183 billion (2005)China: 60% of US MarketAGOA: 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


Cotton to Garments

Polo Shirt

Cotton Material 79.1%

Cutting/ Layering 0.7%

Sewing/ Assembly 10.2%

Finishing 0.3%

Packing/ Loading 4.5 %

Admin /OH 4.8%

Labor 71.5%

Input Material 24.7%

Inefficient Production High Waste: 20-26% Material Use: 386 grams End Weight: 250-275 grams Pattern Waste (Manual Pattern/Cutting): 15% Sewing Assembly Waste: 5% Other Waste: 5% Breakthrough Holes/meter: >7 (acceptable range <3)

Low labor utilization and productivity. 10-12 polo shirts per person. Each line of 25 people has a reserve contingent of 10.

Diagram XXX: Value Chain for Exported Polo Shirt, SOE Firm, Ethiopia

Inspection 0.3 %

Electricity 3.8%

Old Machinery: 30 + years High defect rates: 5%.

Transport 2.7 %

Input 94.9%

Excise 4.5

Rebate Finan 0.6%


Cotton to Garments

Polo Shirt

Cotton Material 65.3%

Cutting/ Layering 0.2%

Sewing/ Assembly 8.6%

Finishing 0.2%

Packing/ Loading 3.4 %

Admin /OH 22.3%

Mainten. 10.9%

Labor 7.4%

High Cost of Locally Sourced Inputs Local Thread: Birr0.69/shirt Imported Thread Birr0.12/shirt

Poor Labor Skills Labor Productivity: 10 shirts/worker Workers still in training stage Need for shop floor improvements: lighting, production flow.

Inspection 0.1 %

Efficient Production Material Use: 286 grams End Weight: 250-275 grams Pattern Waste: CAD/CAM pattern/cutting: 5% Other Waste: 1% Fabric Quality Poor: >7 holes VAT Rebate > 12 months late

Labor 49.7%

Input Material 46.7%

Electricity 3.6%

Depreciation 53.1%

Land Lease 1.8%

Financing 26.2%

Electricity 0.6%

Transport 2.7 %

Input 90.5%

Excise 7.8%

Rebate Finan 1.7%

Diagram XXX: Value Chain for Exported Polo Shirt, Private Firm, Ethiopia


Cotton to Garments

Polo ShirtKey Findings from the Value Chain

Analysis :An Example of Polo Shirt Production

Table XXX: Benchmarking Cost Differential, Private and SOE Production of Polo Shirt Private

Firm SOE Variance from

SOE Cost Total Fabric Cost* (ETB/kg) 35.75 30.74 +16% Excise Duty in Fabric Cost (ETB/kg fabric) 3.07 1.51** +103% Capital Cost VAT Financing 12 months (ETB/polo) 0.19 0.16 +19% Conversion cost – ETB/polo 1.54 1.90 -19% Admin/OH (ETB/polo) 3.80 0.80 +375% Total production cost – ETB/polo 16.76 16.10 +4% Source: Global Development Solutions *medium shade jersey 20Ne, combed **ETB/kg of combed yarn as the SOE is sourcing its own fabric made from outside yarn. Same for VAT.

• Lack of transparent cost accounting (SOE)• Poor labor skills• Excise duty on fabrics hamper competitiveness• High cotton fabric waste (SOE)


Poor Labor Productivity

Cotton to Garments

Polo Shirt

Source: For Knit Shirt, compiled by Global Development Solutions from industry sources. For Jeans, data from The Eastand Central Africa Global Competitiveness Hub, 2005.

10162618211425Five-pocketpair of jeans

EthiopiaMadagascarMauritiusKenyaIndiaUgandaChina

10-121518-2212-151612-1419-22Men’s KnitShirt

EthiopiaSouth AfricaLesothoKenyaIndiaGhanaChina

Number of Garments Produced Per Machine Operator Per Day (8 hours)

Benchmarking Labor Productivity, Selected Countries

Source: For Knit Shirt, compiled by Global Development Solutions from industry sources. For Jeans, data from The Eastand Central Africa Global Competitiveness Hub, 2005.

10162618211425Five-pocketpair of jeans

EthiopiaMadagascarMauritiusKenyaIndiaUgandaChina

10-121518-2212-151612-1419-22Men’s KnitShirt

EthiopiaSouth AfricaLesothoKenyaIndiaGhanaChina

Number of Garments Produced Per Machine Operator Per Day (8 hours)

Benchmarking Labor Productivity, Selected Countries


Cotton to Garments

Polo Shirt

Diagram XXX: Integrated Value Chain for Knitted Fabric Production in Ethiopia

Electricity 48%

Spares & Maint.

20%

Labor 32%

Financing 71%

Depreciation

29%

Blowing

8.4%

Carding

6.5%

Combing

0.0%

Drawing

6.3%

Admin

24.9%

Roving

5.7%

Twisting

43.6%

Winding

4.7%

Raw Material

49.3%

Knitting 3.9%

Pretreatment &Dyeing

30.0%

Admin OH 25%

Mainten. 25%

Energy 26%

Labor 24%

Input Material

66%

Energy 28%

Labor 2%

Water 3%

Spinning 16.8%

1. Excessive Waste: ≈43% a. Spinning Stage: 33%

Blowing 6.0% Carding 4.5% Drawing 2.5% Roving 0.3% Twisting 4.0% Winding 2.0% Unaccounted 13.7%

b. Knitting Stage: 10% Inefficient VAT charged at 15% on inputs. An estimated cost of financing VAT on inputs at 1% of raw material cost. Refunds delayed more than 12 months and Pattern Waste (Manual Cutting & Layering) 15% Sewing Assembly Waste: 5% Other Waste:1% Holes per meter of fabric >7 (acceptable range ≤3) 2. Some SOEs don’t claim refunds.

2. Poor uneven width knit fabric quality with multiple holes in a kg of material that shoots up pattern waste costs of garments producers in the cutting stage.

Significant difference between the price of chemicals in the local market compared to global average prices.



Cotton to Garments

Polo Shirt

Table XXX: Benchmarking Lint-to-Yarn Conversion Rate Kg Yarn/Kg Lint Good Practice 1.10 (91%) Efficient production and clean incoming lint Pakistan 1.20 (83%) Efficient production but relatively unclean

incoming lint Ethiopia* 1.10 – 1.49 (90% - 67%) Clean incoming lint but inefficient production Source: Global Development Solutions, LLC * Note that not all spinning plants in Ethiopia report these high wastage rates. Estimates for Alemeda Textiles lint-to-yarn conversion are in the range of 89% -90%. A low figure from an SOE is used as an example to provide contrast and to highlight the critical need for improvements.

Table XXX: International Yarn Production Cost Comparison, Ring Spun (30Ne)

0

0.5

1

1.5

2

2.5

3

3.5

4

Bra

zil

Ch

ina

Ind

ia

Ita

ly

Ko

rea

Tu

rke

y

US

A

Eth

iop

ia 1

Eth

iop

ia 2

US

D/K

g Y

arn

LINT PRICE Waste Labor Power Auxiliary & Maintenance Depreciation Interest

Source: ITMF 2003 except for Ethiopia, Global Development Solutions LLC. Note: Yarn is 30Ne combed, except for Ethiopia, all other countries assumed to produce with new equipment.

Room for Improving Lint-to-Yarn Conversion Ratio


Cotton to Garments

Polo Shirt

Table XXX: Comparison of Production Costs for Ginning in Ethiopia SOE 1 SOE 2 ETB/kg US$/kg ETB/kg US$/kg Differential Seed Cotton 2.63 $ 0.31 1.20 $ 0.14 45.2% Cost of Lint 9.81 $ 1.14 4.57 $ 0.53 46.5% Ginning Cost 2.89 $ 0.34 1.41 $ 0.16 47.1% Delivered Price of Lint 9 - 10 $1.05 - $1.16 9 - 10 $1.05 - $1.16 Profit Range Low -0.81 $ (0.09) 4.43 $ 0.52 High 0.19 $ 0.02 5.43 $ 0.63 3150.0% Global Development Solutions, LLC

Table: Benchmark of Ginning Out Turn and Cost for Selected Countries Ginning out-turn (GOT) Ginning Costs ($/kg of lint) Kenya 33% $0.15 China 35% $0.05 Pakistan 33-35% $0.07 Kyrgyzstan 35% $0.13 Mozambique 35% $0.18 Ethiopia 38% $0.16 - $0.34 Global Development Solutions, LLC

High Cost of Ginning


Cotton to Garments

Polo Shirt

Table XXX: Comparison of Irrigated vs Rainfed Cotton Production in Ethiopia Irrigated Rainfed % Differential Production Cost ($/ha) $294.09 $303.57 -3.12% Production Costs ($/kg) $0.13 $0.25 -48.01% Yield Rate 2,200 1,200 +83.33% Global Development Solutions, LLC™

Table XXX: Benchmarking Seed Cotton Production for Selected Countries Production Cost Yield Rate

(kg/ha) $/ha $/kg Pakistan Smallholder Large-scale

1,680 3,020

$387.34 $690.00

$0.23 $0.23

Kyrgyzstan 2,450 $393.66 $0.17 Cambodia 1,200 $415.93 $0.35 Kenya 572 $145.88 $0.26 Mozambique 297 $41.15 $0.14 South Africa Smallholder Large-scale

3,747

473

$971.08 $718.77

$0.26 $1.52

Ethiopia Irrigated Large-scale

2,200 1,200

$294.04 $303.57

$0.13 $0.25

Global Development Solutions, LLC™

Irrigation – Key to Competitive Cotton Production


Cotton to Garments

Polo Shirt

Table XXX: Benchmarking Harvesting Costs, Ethiopia vs. Pakistan Large Farms Ethiopia Pakistan Variation Picker Wage ($/day) 1.07 1.08 -1% Picker Productivity (kg/day) 25 32 -22% Picking Labor Cost ($/kg) 0.043 0.034 +26% Total Harvesting Cost ($/kg) 0.057 0.042 +36% Global Development Solutions, LLC

Table XXX: Endosulfan Status in Selected Countries Trade Name

Banned Severely Restricted

Pesticide of Concern

USA, Germany, UK X Netherlands, Sweden, Singapore X Syria, Colombia, India (Kerala) X Belize, Tonga, Brazil X Australia, Canada, Japan, Korea, Taiwan X Denmark, Finland, Norway, Russia, Lithuania,Yugoslavia

X

Cambodia, Bangladesh, Indonesia, Kuwait, Kazakhstan, Philippines, Sri Lanka, Thailand

X

Venezuela, Dominica X Mauritius, Ecuador, Paraguay X Ethiopia Status: None Source: EJF and PAN

Need for Improving Farming Practice



• 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


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


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



Skins-to-Leather Shoes


Leather ShoesMarket Opportunities and

CharacteristicsFresh Sheepskin Production Africa (Total): 154,285 MT

(8.6% of World Production) Ethiopia: 10,0800 MT Ethiopia’s Export of Dried Salted Skins: 2,888 MT

(73.2% of African exports)(6.6% of Global exports)

Table XXX: Benchmarking Off-take Ratio for Sheepskin Off-take Ratio Ethiopia 40% Iran 87% China 71% Global Development Solutions, LLC


Leather Shoes

Diagram XXX: Raw Sheepskin Supply Chain in Ethiopia Source: Global Development Solutions, LLC™, 2006

Sheep Population 25.5 million

Slaughter 10.2 million Off-take/ year (40% of sheep population)

Live Animal Export: 0.03 million (18% of sheep population)

Urban Dweller 7.52-million/year (74% of off-take)

Rural Farmer 2.68-million/year (26% of off-take)

Collector 9.4 million/ year

Merchant 9.4 million/ year

Tannery 9.4 million/ year

Local Market 2.68 million/year (30% of processed finished skin)

Export Market 6.25 million/year (70% of processed skin): Pickled= 84.6% Wet blue= 5.3% Crust = 2.7% Finished= 7.4%

Waste & Damage 0.8 million pieces due to quality problems and traditional use as seat cover (30% of raw skin from farmer)

Waste & Damage Pre-process rejection: 0.47% In-process damage: 5.0%

Abattoir 1% of total slaughter Waste & Damage

89.5% downgraded to below Grade III quality

Raw Sheepskin Supply Chain in Ethiopia:High Waste and Damage


Leather Shoes

Table XXX: Analysis of Random Sampling Test Conducted by Tanneries

Types of Defects Found (%) Year Putrefaction

& heat Ekek

Scratches and scars

Flay cuts and holes

Poor substance

% of Grade I-III Pickle

2001 24% 98% 76% 46.7% 16% 24.07% 2002 68% 99% 97% 38.7% 24% 27.3% 2003 28% 100% 96% 40% 10.7% 25.9% 2004 81.3% 100% 94% 45.3% 18.7% 15.1% 2005 34% 100% 89% 36% 18% 11.5% Source: Global Development Solutions, LLC™, 2006

0

10

20

30

40

50

60

70

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000-4

Grades 1-3

Grade 4

Grade 5

Reject

Declining Share of Grade 1-3 and 4 Skins

Poor Quality of Skins


Leather Shoes

Table XXX: Cost Breakdown of Finished Sheepskin (Birr/ft²)Total % of Total

Raw material 8.02 59.0%Chemical 1.49 11.0%Labor 0.45 3.3%Electricity 0.61 4.5%Depreciation 0.21 1.5%Utilities 0.22 1.6%Effluent treatment 0.12 0.9%Marketing/distribution 0.58 4.3%Overhead 1.9 14.0%Total 13.6 100.0%Source: Global Development Solutions, LLC

Table XXX : Comparative Cost of Wet Blue Manufacturing (Skin) Country US$/ft² Mali 0.36 Bangladesh 0.83 Kenya* 1.00 Zambia* 1.00 Tanzania* 1.70 Ethiopia 1.22 Source: Global Development Solutions, LLC™, 2006 * Prices quoted by UNIDO leather Studies in Africa

High Cost of Wet Blue Production


Leather Shoes

Table XXX: Opportunity Cost of Ekek - Pickled SkinTotal Raw Sheepskin 9,400,000 Pre-process reject/in-process damage 470,000 Total available skins for processing 8,930,000

Grade W/out Ekek Pickled skin cost* Total Cost Selling Price Total Revenue Net ProfitGrade I - III 2,950,000 5.16$ 15,234,245.93$ 7.00$ 20,650,000.00$ 5,415,754.07$ Grade IV 2,680,000 5.16$ 13,839,925.12$ 5.00$ 13,400,000.00$ (439,925.12)$ Grade V and rejects 3,300,000 5.16$ 17,041,698.84$ 4.20$ 13,860,000.00$ (3,181,698.84)$ Total 8,930,000 5.16$ 46,115,869.88$ 47,910,000.00$ 1,794,130.12$

Grade With Ekek Pickled skin cost* Total Cost Selling Price Total Revenue Net ProfitGrade I - III 1,030,000 5.16$ 5,319,075.70$ 7.00$ 7,210,000.00$ 1,890,924.30$ Grade IV 2,450,000 5.16$ 12,652,170.35$ 5.00$ 12,250,000.00$ (402,170.35)$ Grade V and rejects 5,450,000 5.16$ 28,144,623.84$ 4.20$ 22,890,000.00$ (5,254,623.84)$ Total 8,930,000 5.16$ 46,115,869.88$ 42,350,000.00$ (3,765,869.88)$ Opportunity Cost of Ekek 5,560,000.00$

High Opportunity Cost of Ekek

AssumptionsRaw Salted Sheepskin Factory purchasing price (birr/ft²) 8.02 Factory purchasing price (birr/piece) 37.45 Factory purchasing price ($/piece) 4.36$ Pickling Cost/pieceft²/piece 4.67pickling cost/ft² (birr) 1.49Birrs/piece 6.96$/piece 0.81$ Total Cost - Pickled Sheepskin 5.16$

Selling Price Grade I - III 7.00$ Grade IV 5.00$ Grade V/rejects 4.20$ * cost of skin/piece ($4.36) plus pickling cost/piece ($0.81)Exchange rate (Birr/$) 8.6


Leather Shoes


for Leather Shoes

EU Demand for Shoes: €61.8 billion Sourcing from Developing Countries: 24% - 53%Italy (Largest EU Consumer): 395.3 million pairs/yearEthiopian 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.


Key Findings from the Value Chain AnalysisLeather Shoes

Raw Material 98.4%

Labor 0.35%

Electricity 0.43%

Depreciation 0.21%

Maintenance 0.13%

Marketing/ Distribut. 0.28%

Overhead 0.19%

Cutting 61.2%

Sub- Assembly 1.3%

Stitching 4.0%

Lasting Finishing 32.2%

Packing 1.2%

Overhead 0.13%

Raw Material 84.4%

Chemical 3.9%

Labor 3.6%

Electricity 1.0%

Depreciation 4.8%

Maintenance 0.2%

Marketing/ Distribut. 1.1%

Leather Shoe Product Cost: Birr 88.3/pair

• 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)


Leather Shoes

Table XXX: Benchmarking Shoe Assembly Costs

Assembly Cost Cost ($) % of Total Cost ($) % of Total Cost ($) % of Total Labor 0.59$ 78.3% $0.60 66.7% 0.37$ 43.9% Other non-material inputs 0.16$ 21.7% $0.30 33.3% 0.47$ 56.1%Total US$ 0.75$ $0.90 0.84$ Global Development Solutions, LLC

Bangladesh Indonesia Ethiopia

Table XXX: Benchmarking Shoe Production Between China & Ethiopia Minutes/pair Total Minutes/shift Pair/person/shift Ethiopia 78 510 6.5 China 30 600 20 Global Development Solutions, LLC

Poor Labor Productivity

High Assembly Costs



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


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


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



Housing and Construction


Housing & Road Construction

Housing: Profile

Building Height: Ground + 6 floorsTotal Building Area: Multi-family apartment (24 units)

175.23 m²Site Work: 850 m² of asphalt pavement

Table 3: Engineering estimate G+6 Building Description Data Area per floor (m2) 827.26 Total building area (m2) 4,963.56 Total building cost (Birr) 9,635,403.09 Foundation cost (Birr) 941,715.46 Foundation cost per m2 (Birr) 189.73 Cost per floor (Birr) 1,448,947.94 Building cost per m2 1,941.23 Source: Global Development Solutions, LLC

Engineering Estimates



Design 4.0%

Construction 95.3%

Procurement 0.3%

Source: Global Development Solutions, LLC™, 2006

Diagram 1: Housing construction Value Chain in Ethiopia

Housing Construction Value Chain

Table 6: Major stages of housing construction Construction Phase % of total project cost

Sub structure 9.78 Super structure 78.50 Site work 11.72 Total 100.0 Source: Global Development Solutions, LLC™, 2006

Construction Phase



Diagram 3: Major stages of Super structure construction

Super structure 1 % of super structure cost Concert work 11.56 Form work 7.13 Rebar work 17.65 Masonry work 7.98 Roof water proofing 0.71 Roof wall cladding 0.43

Carpenter and joinery 8.00 Metal work 4.65 Plastering 8.09 Wall andfloor finish 8.46 Painting 3.15 Glazing 0.82

Sanitary installation 6.13 Electrical installation 9.57 Lift installation 5.68 Total 100%

Sub- Structure 9.77%

Super Structure 78.5%

Site Work 11.71%

Sub structure % of super structure cost

Excavation and Earth work 9.82 Concret work 42.50 Form work 3.77 Rebar work 40.72 Masonry work 3.19 Total 100%



Table XXX: Breakdown of Super Structure Construction

Rebar Work Concrete Electrical Installation

Labor 4.84% 4.61% 4.25% Material 94.37% 86.79% 95.75% Equipment 0.78% 8.60% 0% Total 100% 100% 100% Global Development Solutions, LLC

High Cost of Input Material

Table 7: Cost of rebar in the market in Birr per kg Rebar diameter (mm) Local made Imported1

6 7 7.50 8 7.10 7.38

10 6.50 6.75 12 6.35 6.75 14 6.25 6.26 16 6.52 6.59 20 7.37 6.24 24 7.20 6.45


1 Imported from various countries including China, Ukraine and India



Cement Buyer Request for purchase

Requested amt: 250 tons Actual need: 100 tons

Ministry of Trade and Industry (MoTI)

Issue request for a survey Assessment of requirement

Issue letter for release of cement

Cement Plant (Mugher and Mosobo)

Register buyer on wait list Random disbursement

tranche (ad hoc according to the manager’s discretion)

Release cement in multiple batches

Assessment Assessed amt: 250 tons

14 days

Informal Market

Cement readily available at spot price 30% - 50% higher than in formal market price

Cement Buyer

Informal market price

Time Lapse Surplus: 150 tons

Time Lapse

> 4 months

7 days


Diagram 5.1: Cement Purchase Transaction Flow Map

Table XXX: Benchmarking Cement Price (2006) Country US$/Ton

Dubai $71 Jordan, Turkey, Egypt, Cyprus $40 - $60 Ethiopia $92 - $138* * informal market price Global Development Solutions, LLC



Table 1: Road density in some African countries

Country Km of road per 1,000 km² of land area S. Africa 430.7 Nigeria 212.1 Kenya 118.1 Zambia 86.9 Tanzania 71.3 Angola 57.8 Madagascar 51.4 Ethiopia 33.2 Mozambique 32.5 Mali 13.3 Sudan 9.7 Source: Status Report on the Brussels Program of Action (BPoA) for Least Developed Countries (LDCs), Ministry of Finance and Economic Development (MoFED) January 2006

Low Road Density


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%)


Common Excavation 6.4%

Capping 14,8%

Sub - Base 21.3%

Prime Coat 1.9%

Base Course 48%

Asphalt first Surface treat. 3.6%

Asphalt second Surface treat. 2.9%

Clearing & Grubbing 1.2%

Design & Supervision 4%

Procurement 0.3%

Road Project Development 5.7%

Construction 90%

Total Road Construction Cost: Birr 2.7 million/km (Excluding cost of eng. facilities)

Road constriction cost: Birr 2.4 million/km



Diagram 6 : Value Chain Road Construction in Ethiopia --- Base - course Phase

Rock Crushing 25%

Quarry rock Production 33%

Material Placing 24%

Material Hauling 18%

Material 52.9%

Labor 4 .4%

Equipment 42.7%

Material 47.7%

Equipment 49.4%

Labor 2.9%

Labor 2.8%

Equipment 97.2%


Table 4: Base-course Cost Breakdown Material Labor Equipment Total % of Total

Process birr/m3 birr/m3 birr/m3 Birr/m3

Quarry rock production 42.04 2.61 43.55 88.21 33%

Rock crushing 0.00 1.89 65.03 66.92 25%

Material hauling 0.00 0.81 48.21 49.02 18%

Material placing 33.75 2.81 27.19 63.75 24%

Total 75.79 8.12 183.98 267.90 100% Source: Global Development Solutions, LLC™, 2006

High Equipment Input Requirement



Table 6: Renting and purchase Price of Construction Equipment In Ethiopia (2006) Type of Equipment

Renting Price Per Hour in ETB

Renting Price Per Hour in USD

Purchasing Price Addis Ababa in ETB

(millions) Dozer D8R 1,000.00 115.74 3.7

Loader 900R 350.00 40.51 1.4

Grader 140H 450.00 52.08 2.2

Roller 350.00 40.52

Excavator 300 Excavator 214 Excavator 212 Excavator 318

650.00 350.00 300.00 400.00

75.23 40.51 34.72 46.30

2.9 2.2 1.5 2.5

Dump Truck 120.00 13.89

Exchange Rate: ETB 8.63/USD Source: Global Development Solutions, LLC

Table XXX: Characteristics of Term Loans in Ethiopia Term loan Duration (years) % of Portfolio Interest rate Short <1 >70% 5% Medium 1 - 5 <30% 7% - 9% Long 5 - 7 <10% 9% - 10.5% Global Development Solutions, LLC

High Cost of Equipment Rental and Finance



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.



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.



• 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.)


An Overview of theIntegrated Value Chain Analysis™

Of Selected Strategic Sectors

The Government of Ethiopiaand

The World Bank Group

Addis Ababa, Ethiopia23 May 2006

Presented byGlobal Development Solutions, LLC™

www.GDS-LLC.com

integrated value chain analysis™

Business

selected strategic sectors

global development solutions

roadconstruction high cost

excise duty

skilled labor

high cost

public sector

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