46993 Moving Toward Competitiveness: A Value Chain Approach FIAS: The Foreign Investment Advisory Service A joint facility of the International Finance Corporation, the Multilateral Investment Guarantee Agency, and the World Bank August 2007 Copyright © 2007 The World Bank Group 1818 H Street, NW Washington, DC 20433 All rights reserved Manufactured in the United States of America 2007 Available online at www.fias.net Address comments and questions to the author at usubramanian@worldbank.org. The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work without permis- sion may be a violation of applicable law. The World Bank Group encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint, please send a request with complete information to: Copyright Clearance Center, Inc. 222 Rosewood Drive Danvers, MA 01923, USA t. 978-750-8400; f. 978-750-4470 www.copyright.com All queries on rights and licenses, including subsidiary rights, should be addressed to: The Office of the Publisher The World Bank 1818 H Street NW Washington, DC 20433, USA f. 202-522-2422 E-mail: pubrights@worldbank.org. FIAS is a multi-donor service of IFC, the private sector arm of the World Bank Group; the Multilateral Invest- ment Guarantee Agency; and the World Bank. FIAS advises governments of developing and transitional coun- tries on how to improve their investment climates for domestic and foreign investors, focusing on four main areas: investment climate diagnostics, investment laws and promotion, administrative barriers solutions, and industry competitiveness. Since its establishment in 1987, FIAS has assisted over 130 countries in increasing the level and impact of private investments through more than 740 interventions. For more information, visit www.fias.net. The findings, interpretations, and conclusions expressed here are those of the author and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank Group does not make any representations or warranties regarding the completeness or accuracy of the information included this report, or the results which would be achieved by following its recommendations. Acknowledgments This technical report was written by a team led by Uma Subramanian with inputs from Michela Paludetto and Peter Yee. Natalia Cubillos, Matthias Matthijs, Patricia Steele, and Victor Abiola provided very useful inputs at various stages. The report benefited from extensive comments from several colleagues, including Nigel Twose, Thomas Davenport, Vincent Palmade, Zoubida Allaoua, Andrew Stone, Hamid Alavi, Simon Bell, Eric Manes, Asli Demirguc-Kunt, Colin Xu, Leora Klapper, Gabi George Afram, Fernando Montes Negret and Paulo Correa. Vincent Palmade provided input to Annex 2. Kihoon Lee's help with data and graphs is greatly appreciated. i i i Contents Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix Chapter 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Purpose and Target Audience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Chapter 2: Value Chain Analysis--the Key Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Basic Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Source . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Make . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Deliver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Sector Choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Market Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Value Chain Mapping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Chapter 3: Measuring Performance and Establishing Benchmarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Benchmarking: Uses and Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Cost, Quality, and Supply of Raw and Intermediate Materials . . . . . . . . . . . . . . . . . . . . . . . . . 25 Primary Factor Cost Drivers (Labor, Capital, Land) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Utilities, Administrative Overheads, and Other Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Trade Logistics and Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 v v i M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Chapter 4: Developing Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Example: Tourism in Mozambique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Example: Textiles in Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Annexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 1. Acronyms Used in this Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 2. Value Chain Analysis: Policy Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 3. Product Value Chain Analysis: Sample Terms of Reference . . . . . . . . . . . . . . . . . . . . . . . . 50 4. Sample Sourcing Business Survey (Peru Textiles) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 5. INCOTERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 6. Industry Competitiveness Indicators for Value Chain Analysis . . . . . . . . . . . . . . . . . . . . . . 62 7. Sample Policy Recommendations & Action Plan Matrix: Mozambique Tourism High Priority Initiatives) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 List of Figures Figure 1. Sample Policy Recommendations Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii Figure 2. Example of Potential Implementation Projects Following an Industry VCA . . . . . . . 5 Figure 3. Key World Farm Shrimp Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Figure 4. Shrimp Trawling Value Chain for Nigeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 5. Shrimp Value Added and Shipment Value Breakdown . . . . . . . . . . . . . . . . . . . . . . . 7 Figure 6. Extended Value Chain of Cattle Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Figure 7. Key Elements of Value Chain Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Figure 8. Value Chain Mapping Activities: Coffee in Honduras . . . . . . . . . . . . . . . . . . . . . . . . . 16 Figure 9. Honduran Coffee Value Chain Dynamics: Structure of Industry . . . . . . . . . . . . . . . 16 Figure 10. Honduran Coffee Cluster: Interaction of Stakeholders . . . . . . . . . . . . . . . . . . . . . . . 17 Figure 11. Factor Productivity Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 12. Sample Benchmark Indicators for a VCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Figure 13. A Comparison of the Kenyan and Honduran T-Shirt Value Chains . . . . . . . . . . . . . 25 Figure 14. Time to Complete Import Procedures (Honduras, Kenya, and Spain) . . . . . . . . . . 33 Figure 15. Sample Policy Recommendations Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 List of Tables Table 1. Unit Labor Cost Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Table 2. Shuttles Installed in Selected Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Table 3. Electricity Indicators for Selected Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Table 4. Senior Management Time Dealing with Bureaucracy . . . . . . . . . . . . . . . . . . . . . . . . 30 Table 5. Nigeria: Regulatory Procedures (Economy Wide) . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Table 6. Nigeria: Regulatory Procedures (Specific to the Shrimp Sector) . . . . . . . . . . . . . . . 32 Table 7. Summary Recommendations for the Tourism Sector in Mozambique . . . . . . . . . . . 37 Table 8. Recommendations for the Indonesian Textile Sector . . . . . . . . . . . . . . . . . . . . . . . . 39 C O N T E N T S v i i List of Boxes Box 1. Sample Market Analysis Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Box 2. Sample Questions for Buyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Box 3. Sample Questions for a Mapping Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Box 4. Cost and Time Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Box 5. Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Box 6. Shipment Value Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Box 7. Sample Questions for Establishing Benchmarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Box 8. Questions to Consider When Assessing Cost, Quality, and Supply of Materials . . . 26 Box 9. Questions related to Factors of Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Box 10. Factoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Box 11. Questions to Consider When Assessing Administrative Costs . . . . . . . . . . . . . . . . . . 30 Box 12. Questions to Consider When Assessing Trade Logistics . . . . . . . . . . . . . . . . . . . . . . 34 v i i Executive Summary Developing countries face tremendous opportunities prise Survey series, Investment Climate Assessment for economic growth given economic liberalization reports (ICAs) and FIAS'1 regulatory reform and in- worldwide, and rapid advancement and application vestment generation products--all of which address of information and communications technologies. public policy issues that constrain the overall busi- However, along with the many opportunities global ness environment. The industry-specific value chain network trade has to offer, firms in developing coun- approach presented in this report complements tries also face strong competitive pressures for greater these products. In addition to the economy-wide efficiency and productivity to maintain market share business environment issues addressed by many of or even survive. A strong business environment based these products, the value chain approach uncovers on sound institutions and policies is a necessary sector-specific constraints, offering yet another "lens" basis for enhanced competitiveness of private firms through which the underlying public policy issues can that produce and deliver goods and services. When be addressed. business environment constraints--inefficiencies and cost disadvantages--can be identified, policy makers have the opportunity to jumpstart economic What is value chain analysis? reform processes that target priority areas along the product/service life cycle known as the value chain. Value chain analysis (VCA)2 is a method for account- This technical report outlines a pragmatic approach ing and presenting the value that is created in a for analyzing value chain performance as the basis for product or service as it is transformed from raw in- identifying binding constraints to growth and com- puts to a final product consumed by end users. VCA petitiveness. This approach is intended to facilitate formulating a targeted reform agenda. 1. The Foreign Investment Advisory Service (FIAS) is a multi- The World Bank Group (WBG) uses a myriad of donor advisory service of the World Bank Group, jointly sup- policy tools to support its ongoing private sector ported by the International Finance Corporation (IFC), the World Bank, and the Multilateral Investment Guarantee Agency (MIGA). development work. There are many established prod- 2. In this report, VCA is used to mean either "value chain ucts--including the Doing Business reports, Enter- analysis" or "value chain approach." i x x M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H typically involves identifying and mapping the rela- · Market related issues (e.g., market diversification, tionships of four types of features: (i) the activities research and development, product diversifica- performed during each stage of processing; (ii) the tion, supplier linkages). value of inputs, processing time, outputs and value- added; (iii) the spatial relationships, such as distance and logistics, of the activities; and, (iv) the structure Purpose and target audience of this of economic agents, such as suppliers, the producer, publication and the wholesaler. Value chains can become com- plex when they reflect multi-stage production systems This technical report offers a rationale and a practi- with multiple types of firms operating in different lo- cal approach for using VCA as an empirical tool in cations in one country or multiple countries around identifying binding constraints to industry growth and the world. competitiveness. While this publication is not a "how- The industry value chain approach introduced in to" manual per se, it aims to present a sound analyt- this technical report relies on the traditional market- ical framework, pointing to useful insights on how to related context of value chain analysis in identifying infer business environment-related policy issues. It failures in sourcing, manufacturing, and delivery. 3 Yet outlines the key elements of value chain studies and this approach is unique in recognizing the key pub- discusses methodological issues in delivering results lic policy, institutional and infrastructure factors un- that can be reliably compared across studies and derlying constraints in the business environment. that can provide a basis for the development of poli- For instance, regulations related to trade, taxes, licens- cies and institutions. Thus, the approach and case his- ing and standards often significantly impact firm tories presented here are intended to contribute to competitiveness. The emphasis on these types of ongoing discussions on good practices in VCA within factors and their impacts on an industry's market- and outside the World Bank Group. based value chain not only helps in pinpointing The VCA methodology highlights the linkages be- priority areas for reform in an industry-specific tween public policies and the performance of in- context, but also in designing policy solutions within dustries (or firms), and therefore it is an appropri- the environment in which firms operate. ate tool for a broad audience in both the public and The policy and reform agenda that typically private sectors. It is aimed at practitioners who con- emerges from the value chain approach presented duct VCA with a view to getting at policy and insti- here relates to three core areas: tutional issues affecting industries. It may also be use- ful to private sector groups in WBG client countries · Product market issues (e.g., trade policy, compe- as they strive to improve their sectors' competitive- tition policy, price distortions, subsidies, licensing, ness. The data-based reform agenda enables private product standards, customs, logistics, property sector stakeholders--firms, trade associations, and rights, enforcement of regulations); business advocacy groups--to advocate for reforms · Factor market issues (e.g., wages, capital charges, that address priority economy-wide and sector- utility market issues, labor market rigidities, land specific issues as identified in the VCA. price, zoning); The stages of VCA 3. In addition to WBG units, many other international devel- opment agencies such as GTZ, USAID, COMMARK, and ILO, also use value chain approaches. Industry value chain analyses con- The three integral stages of the VCA presented in this ducted by GTZ, USAID and the World Bank Group's Value Addi- report include: tion to Firms business line have primarily focused on "market fail- ures." The main objective of these projects has been to help · Process mapping of industry chains in qualitative producers ramp up global value chains, create markets and strengthen backward linkages. (graphical) terms and quantitative terms by disag- E X E C U T I V E S U M M A RY x i gregating metrics such as cost, time, productivity, and job productivity. As shown in Figure 1 below, the and value addition along the various segments of VCA framework identifies a priority set of issues, each chain. The qualitative mapping presents all some of which are sector specific while others apply activities, actors, relationships among segments of to the entire economy and affect many sectors and the chain and interaction between the various firms in a country. Also, some issues typically need stakeholders, including producers, intermediaries to be addressed primarily by the public sector while and buyers. others are driven mainly by the private sector.4 · Establishing benchmarks for performance indica- tors against international competition and best practices. The performance measures together Case studies in VCA and related policy with benchmarking against comparators helps in: recommendations Assessing the relative importance of the differ- ent issues that affect the performance of the The case studies of the shrimp industry in Nigeria and value chain, and; tourism in Mozambique help to illustrate the basic Prioritizing the most binding constraints that concept and application of VCA. The Nigerian shrimp directly affect the competitiveness of an industry was a promising sector in terms of growth industry. potential, job creation and future export earnings,5 · Explicitly understanding the policy and institu- that had displayed a turnaround from a serious de- tional factors underlying these performance mea- cline apparent a decade ago. It was one of four indus- sures. This helps in developing a targeted reform tries in Nigeria chosen for VCA by the WBG project agenda that, if addressed, will enhance growth group across a continuum of performance (declin- and competitiveness of the subject industries, and ing, nascent, recovering, and successful rebirth) de- will potentially attract private investments, en- signed to bring to light most of the policy issues af- abling higher value job creation. fecting the country's non-oil sectors. In Mozambique, the VCA of the tourism industry An important preparatory step for the VCA in- was part of a larger effort to diversify the economy cludes sector choice which is to determine the actual and help sustain an average 8 percent annual growth sector(s) that will be analyzed, and more specifically, rate following the country's dramatic post-conflict re- the product focus based on criteria such as contri- covery. The Mozambique study analyzed both the mi- bution to the gross domestic product (GDP), export croeconomic and structural dimensions of the earnings, attractiveness for private investment, pol- tourism sector to pinpoint the factors constraining icy relevance, job creation, local value added, and so product and factor markets, as well as the delivery of on. Another important element (market analysis) is services in meeting the changing needs of tourists to provide a solid basis for understanding industry visiting Mozambique. trends and issues both within the country and in the international arena. Nigeria's shrimp industry. Nigerian shrimp sup- pliers to the European Union(E.U.)market are rep- resented by a trawling industry of about 20 compa- Formulating policy and programs from value nies which annually export about US$55 million in chain analysis frozen shrimp to the E.U. Frozen wild shrimp from The findings of previous value chain studies have pro- 4. Both the public and private sector must work closely to- vided the strategic underpinnings for growth and gether on several of these issues if they are to be addressed ef- competitiveness strategies, small and medium-sized fectively. However, to emphasize the primary responsibility, issues are divided between the public and private sector in Figure 1. enterprise (SME) projects, and technical assistance 5. USAID, Industry Action Plan for Nigerian Shrimp and Prawns, projects to help strengthen business environments 2002. x i i M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Figure 1 Sample Policy Recommendations Framework Public Sector Private Sector · Reduce VAT Redemption delays · Private power provision to rationalize cost and/or enhance performance · Risk-based system for profiling tax payers, backed Wide by an effective post-refund audit system · Private water and sanitation · Review and/or revise Investment Code to ensure · Privatize air/sea ports level playing field between SME and large firms Economy · Improve land registries; clarify titling/leasing or user rights · Remove tariff distortions on main imported inputs · Shop floor management enhancements to increase for the sector productivity · Reduce barriers to Import Licenses for key actors in · Diversification of products and/or markets; Specific the sector · Improve capacity of suppliers, infrastructure for · Improve enforcement of product standards sourcing to improve backward linkages · Policy for attracting FDI (e.g., hotels) · Promotion for attracting FDI in for e.g. hotels, tourism Industry products Source: Uma Subramanian (2007). A useful framework for developing a targeted reform agenda categorizes sample recommendations derived from the industry VCA into a matrix. Recom- mendations are grouped along one axis according to whether they apply economy-wide or by industry; along the other axis, solutions that are primarily addressed by public sector agencies are separated from those handled by private firms. Nigeria are purchased by large European wholesalers logistics. The major factors that contributed to the on a "free on board" (FOB) basis at the port of Lagos "turnaround" of Nigeria's shrimp sector: the high- and then enter the E.U. under the preferential quota- value nature of the product; increasing demand in the free and tariff-free access offered by the Cotonou E.U.; and the quality of the product, which meets Agreement. A cold chain keeps the shrimp frozen international quality standards. throughout the supply chain from trawling to final The growth in demand for shrimp and the Niger- delivery, a procedure that meets critical E.U. Hazard ian industry's relatively straightforward value chain al- Analysis and Critical Control Points (HACCP) stan- lowed for integration of the industry's production into dards for market entry. the global value chain. By incorporating HACCP qual- The VCA identified four key cost drivers: (i) fuel, ity and production standards into their operations, used for vessel operation and the critical cooling Nigerian shrimp producers effectively accessed high- chain, which accounted for 32 percent of the ship- end European markets willing to pay premium prices ment value; (ii) administrative overhead costs, 12 for high-quality goods. It is hard to imagine that the percent; (iii) capital charge, 10 percent; and (iv) lo- industry would have been able to reverse its decline gistics, 5 percent. Despite the high cost elements, the without E.U. market access. In this regard, the Niger- value added component of the shrimp chain gener- ian government was influential in fostering growth in ated a profit rate of 18 percent of the value added after its shrimp industry through effective policy implemen- covering the costs of both the primary inputs and the tation to acquire the HACCP certificate. E X E C U T I V E S U M M A RY x i i i Mozambique's tourism industry. Tourism in tional distribution networks, and a thin product line Mozambique is growing at a 13 percent annual rate dispersed across locations. More generally, a conflu- as Africa captures an increasing share of the global ence of investment climate issues is preventing dy- tourism market. Yet this growth rate is from a very namic development of the industry; the weak in- low base level in Mozambique. Mozambique attracts vestment climate increases costs for finance and relatively fewer tourists, particularly intercontinental inputs, drains resources from the private sector, and visitors, who spend less than in other destinations in creates an uneven playing field and entry barriers for Africa and other world regions. innovative entrepreneurship. The tourism value chain in Mozambique required As a result of the VCA, targeted policy recommen- an assessment of each value chain component, such dations were developed to address four key areas of as air carriers, hotels, restaurants and tours, in the industry constraints: (i) the ease and costs of access overall tourism experience, in addition to the link- to destinations in Mozambique, which included visas ages to other agents, and the performance of the ser- and frontier issues, airline connections and services vice providers, industries and institutions. The study in addition to infrastructure, and ground transporta- focused on three typical trip itineraries6 chosen to re- tion; (ii) regulatory and administrative constraints in flect the heterogeneity of tourism products, destina- the business environment associated with land user tions and market segments that characterizes Mozam- rights, licensing, business start ups, investment codes bique's tourism offer. all of which hampered investments in hotels, resorts Although the VCA validated Mozambique's valu- and alternative tourism accommodations; (iii) tourism able intrinsic assets and strong comparative advan- institutions and stakeholder cooperation in effec- tage in tourism, it also found the industry is con- tively developing, maintaining and marketing tourism strained by poor accessibility and positioning in the resources; and (iv) linkages, leakages and increasing international marketplace, absence from the interna- value added, in order to capitalize on the tourism in- dustry's inherent forward and backward linkages that spill over into other sectors. (See Annex 7: Sam- 6. Lisbon­Maputo­Vilanculos/Bazaruto (Southern Leisure Mar- ple Policy Recommendations & Action Plan Matrix: ket); London­Johannesburg­Pemba­Quirimbas (Northern Up- scale Market); and, Europe/USA­Maputo (Business/Conference). Mozambique Tourism High Priority Initiatives.) 1 Introduction Context Developing countries face tremendous opportunities The World Bank Group uses a myriad of policy tools for economic growth given the increasing conver- and approaches to support its ongoing private sec- gence of economic policies, and advancement and tor development work--including the Doing Business widespread application of information and commu- reports, Enterprise Survey series, Investment Cli- nications technologies. A growing number of coun- mate Assessment reports, and FIAS' regulatory reform tries are producing and delivering products and ser- and investment generation products--all of which ad- vices in today's global environment of unprecedented dress public policy issues that constrain the overall decentralization. However, along with the many op- business environment. The industry-specific value portunities global network trade has to offer, coun- chain approach (VCA)3 presented in this report com- tries and firms also face strong competitive pres- plements these products. In addition to economy- sures for greater efficiency and productivity to wide investment climate issues, VCA uncovers sector- maintain their market share or even to survive. There specific constraints, thus offering yet another lens is a growing consensus in the development com- through which to identify and understand the under- munity that sound institutions and policies that en- lying public policy issues. These sector-specific is- hance a country's investment climate are often de- sues are often important in jumpstarting more com- cisive to the countries and firms that face this global prehensive economic reform processes in client challenge.1 countries. The World Bank Group's "private sector develop- By analyzing the costs of doing business through ment strategy" has underscored several microeco- a specific product or industry lens, VCA facilitates nomic issues relating to both product and factor the identification of binding constraints to growth markets as critical elements to the successful devel- opment of these public policies and institutions.2 2. World Bank, Private Sector Development Strategy: Imple- mentation Progress Report (June 2003). 3. This report uses VCA to abbreviate "value chain analysis" and 1. See, for example, Klein and Hadjimichael (2003). "value chain approach." 1 2 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H and competitiveness4 and the effective targeting of in- VCAs are integrated with other analyses as part of stitutional and policy-related issues, at the sector and larger integrated studies (e.g., sources of growth economy-wide levels alike. The reform agenda that studies, growth and competitiveness strategies, and typically emerges from the VCA presented here relates ICAs). For example, VCA was integral to the ICA re- to three core areas: port in Cambodia and provided important inputs to the World Bank's growth and competitiveness strate- · Product market issues (e.g., trade policy, compe- gies in Bangladesh, Kenya, and Pakistan. tition policy, price distortions, subsidies, licens- Value chain analyses are a good way to under- ing, product standards, customs, logistics, property stand relationships and linkages among buyers, sup- rights, enforcement of regulations) pliers, and a range of market actors in between. For · Factor market issues (e.g., wages, capital charges, example, a coffee value chain links coffee producers utility market issues, labor market rigidities, land to processors and multinational buyers at one end of price, zoning) the chain, and to suppliers of inputs (such as fertil- · Market-related issues (e.g., market diversification, izer producers) at the other end. Many VCAs also in- research and development, product diversifica- corporate the role of transportation, utility, and finan- tion, supplier linkages). cial service providers, among others. However, the focus on inter- and intra-industry and firm relation- VCA plays an increasingly useful role in the World ships--although extremely useful in its own right-- Bank Group's work to improve the investment cli- captures mainly market-related insights and often mate. A number of groups and units within the World misses the policy and regulatory environment (e.g., Bank Group are already engaged in value chain stud- taxes, licensing, standards, etc.) in which private ies in various countries and regions of the world, in- firms operate. Policies and regulations often have a cluding Africa, Latin America, Central Asia, South significant effect on firm-level competitiveness and the Asia, East Asia, and the Middle East and North Africa. performance of the chain. By explicitly synthesizing FIAS itself is directly involved with several value chain government policy issues with market relationships, studies in a number of countries.5 the type of value chain analysis presented in this re- Value chain analyses are sometimes "stand-alone" port helps to clarify which binding constraints to studies that provide direct inputs to government growth and competitiveness are affecting the firms strategies. In Indonesia, the value chain analyses of that comprise the industry. selected sectors were key inputs for the govern- This integration of the public policy environment ment's export competitiveness strategy.6 Sometimes with market relationships makes this approach differ- ent from VCA undertaken by other agencies, such as 4. Value chains are generally used to assess the competitive- Germany's Gesellschaft für Technische Zusamme- ness of firms within an industry. The value chain analysis ap- proach presented in this report focuses on industry competitive- narbeit (GTZ) and the U.S. Agency for International ness, as evidenced by the aggregate ability of firms within an Development (USAID). Their primary focus is on ad- industry to compete in their markets. Underlying measures of in- dressing market failures, often with the objective of dustry competitiveness include productivity, costs, growth in ex- ports, market share, and growth in profits. At the individual firm helping small and medium-sized producers create level, competitiveness is demonstrated in profitability and in- markets, strengthen links with global buyers, and creased market share. There are other definitions for competitive- better integrate with global value chains.7 ness that do not apply in this case. For instance, VCA does not ex- amine how well a country's economy is performing compared to other economies, as embodied in the standard of living and 7. In addition to World Bank Group units, many other inter- changes in national productivity. national development agencies such as GTZ, USAID, the ComMark 5. FIAS (Foreign Investment Advisory Services) is a joint advi- Trust, International Labour Organization, and others also use sory service of the World Bank and the International Finance Cor- value chain approaches. Among academics, Michael Porter (1985) poration. FIAS has applied the value chain methodology to agribusi- and Gary Gereffi (1994) in particular have pioneered approaches ness and manufacturing and, more recently, also to the tourism to VCA. Porter focused on how individual firms can create value sector. and build up their competitive advantage; Gereffi focused prima- 6. FIAS (2006b). rily on the economic governance patterns in "global" value chains. C H A P T E R 1 . I N T R O D U C T I O N 3 The three integral stages of the VCA presented in quantitative indicators for typical value chain studies, this report include: thus allowing for cross-country comparisons. De- spite differences in the types of sectors and products · Process mapping of industry chains in both qual- analyzed, relevant indicators (such as input prices, fac- itative (graphically) and quantitative terms by dis- tor costs, logistics time and costs among others) can aggregating metrics such as cost, time, productiv- be computed and compared. ity, and value addition along the various segments By linking public policies and the performance of of each chain. industries (or firms), the value chain approach is rel- · Establishing benchmarks for performance indica- evant for a broad audience in the public sector, pri- tors against international competition and best vate sector, and international development agencies. practices. This process helps in: Assessing the relative importance of the differ- The Public Sector ent issues that affect the performance of the value chain, and; Because the primary clients for the WBG's business- Prioritizing the most binding constraints that di- enabling environment work are governments of de- rectly affect the competitiveness of an industry. veloping countries, the regulatory and public policy · Explicitly understanding the policy and institu- focus of this value chain approach is relevant in pro- tional factors underlying these performance mea- viding a specific policy reform agenda in addition to sures; this facilitates the development of a tar- the more traditional market-related agenda of most geted reform agenda for the public and private other industry value chain studies. This approach sectors to address the binding constraints. shows public sector agencies the effects of certain policies that directly and indirectly affect private sec- tor competitiveness and growth. Purpose and Target Audience For example, a few years ago, the Nigerian govern- ment introduced an export subsidy to promote non- Moving Toward Competitiveness: A Value Chain Ap- oil exports. A VCA of the cotton textile industry proach offers a rationale and a practical approach for showed the unintended effect of the export subsidy using VCA as an empirical tool in identifying binding on other parts of the value chain. Because cotton constraints to industry growth and competitiveness. growers were exporting cotton on an accelerated While this publication is not a "how-to" manual per basis to take advantage of the export incentive, the se, it aims to present a sound analytical framework Nigerian textile industry experienced a significant by pointing to useful insights on how to infer busi- shortage of raw material which forced them to im- ness environment-related policy issues. It outlines the port higher-priced cotton, thereby significantly in- key elements of value chain studies and discusses creasing their production costs.9 The distortionary methodological issues in delivering results that can effect of the export subsidy on different segments of be reliably compared across studies and that can the textile chain was among the key issues that af- provide a basis for the development of a reform fected the sector's survival. agenda.8 Thus, the approach and case histories pre- The Kenyan cut flower industry offers another in- sented here are intended to contribute to ongoing teresting example. Even though nearly all cut flow- discussions on good practices in VCA within and ers in Kenya were produced for export purposes, outside the World Bank Group. Although the ap- farmers were still required to pay a value-added tax proach presented here does not entail a standardized (VAT) up front for imported inputs, and to claim re- set of survey questions, it identifies a minimal set of imbursement afterward. In practice, many small and medium-sized flower producers (often facing a 8. The report is not designed to guide task managers in elab- orate detail on how to conduct a value chain project, nor to ad- vise policy makers on "which sectors to choose." 9. Yee and Paludetto (2005). 4 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H chronic lack of working capital), had to wait up to market structures and reward mechanisms.13 Armed 12 months to receive their refunds. This impeded with this knowledge, an individual firm can determine their ability to invest in expanding capacity and stay- how well it is meeting end-market requirements, ing current with new technology.10 what improvements may be needed, and how it can In Indonesia, one of the major findings of the maximize its returns within the chain structure. shrimp value chain study was that the lack of effec- tive enforcement of standards by government agen- International Development Agencies cies hurt the industry's growth potential and credi- bility in key international markets.11 Applying a VCA--a commonly used tool in private business--to public policy objectives enables devel- The Private Sector opment agencies to: The data-based reform agenda enables private sec- · Catalyze the momentum for policy and institu- tor stakeholders--firms, trade associations, and busi- tional reform by creating a "bottom-up" policy ness advocacy groups--to advocate for reforms to ad- agenda that incorporates a sector perspective; dress priority economy-wide and sector-specific issues · Provide an effective platform for data-based public- as identified in the VCA. private dialogue and partnership; For example, a value chain study on textiles in In- · Enable the spread of technological know-how donesia12 showed the negative effect that a 10 per- through stronger linkages among private firms cent VAT had on the competitiveness of the entire tex- with regional and global supply chains; tile industry. The delays alone in VAT restitution for · Examine the allocation of value added across the imported cotton implied an extra cost equivalent of chain, which has implications for job creation and 9­14 percent of the total profit of an average textile higher wage employment, and ultimately for firm. This information gave the textile industry fur- poverty reduction. ther support that helped them make the case for a complete elimination of VAT on cotton imports, a re- One of the most significant outcomes of previous form which was subsequently passed. It is important VCA projects was that they brought together produc- to note that the VAT issue in the textile industry also ers, intermediaries, government agencies, and other underlines the cost of doing business for other pri- relevant stakeholders in different segments of a value vate industries in Indonesia. chain. The findings of the VCA enabled these play- As a tool used in business operations, the value ers to jointly seek solutions to overcome key im- chain mapping exercise helps a firm to determine pediments that affected the performance of the which stakeholders are involved in the chain, and how chain. For example, high import tariffs on fertilizers and where they affect the production and distribu- increase the production costs of cotton growers. A tion, revealing opportunities to forge new or better VCA can help assess these tariffs on the production relationships that can influence the firm's level of costs of cotton growers and trace their effect on the success in the chain. For firms trying to access inter- competitiveness of a downstream, higher-value indus- national markets, when each firm is only a small try such as yarn spinning or cotton shirt produc- part of the total value chain, a VCA provides informa- tion. This kind of understanding is enhanced by both tion on the overall chain structure and the relation- the quantitative and qualitative data generated by a ship between the firms in the chain, including end- VCA and will considerably strengthen reform advo- cacy efforts. The findings of previous VCAs have provided the 10. World Bank Group (2005c), Kenya: Growth and Com- strategic underpinnings for growth and competitive- petitiveness. 11. FIAS (2006b). 12. FIAS (2006b). 13. Gereffi (1994). C H A P T E R 1 . I N T R O D U C T I O N 5 Figure 2 Example of Potential Implementation Projects following an Industry VCA ADVISORY AND INVESTMENT PROJECTS · Industry Specific Licensing · Trade Policy (tariffs, agreements) · Product Quality Standards · Infrastructure · Taxes · Labor Policy · Trade Logistics · Innovation · Corporate Social Responsibility · Governance · Foreign Direct Investment Promotion · Land Policy · Competition Policy · Linkages · Investment Law · Firm level / Business Associations · Land Administrative Barriers Capacity Building ness strategies, and for projects designed to improve Figure 2 depicts the range of potential downstream the business environment for small and medium- implementation projects enabled by the results of a sized enterprises.14 In Kenya,15 for example, the find- VCA; some are of a technical advisory nature, while ings of a value chain study provided the basis for a proj- others may be direct investment projects. ect that was designed to increase productivity and employment in small and medium-sized enterprises by strengthening financial and non-financial markets. Example: The Shrimp Value Chain in Nigeria The set of activities implemented to support enter- prise needs included a value chain­based, subsector- The basic concept of value chain analysis is illus- matching grant fund, tools for business schools to trated by examining the shrimp value chain in Nige- improve management training, a business plan com- ria. In order to uncover priority policy issues affect- petition to promote innovation and entrepreneurship, ing the non-oil sectors in Nigeria, the WBG project and a restructuring of the national levy scheme to en- team, in close consultation with the government, sure sustainability of firm-level training. The project decided to apply VCA to a combination of booming was also designed to reduce compliance costs in busi- as well as declining industries. The industries se- ness regulations, and to create incentives for informal lected were: textiles (declining), cassava (nascent), firms to graduate to higher levels of formality. The proj- leather (recovering) and shrimp (successful rebirth). ect assisted in implementing a simplified taxation Nigeria's shrimp exports enter the European regime and in reducing the cost of starting up busi- Union under the Cotonou Agreement (successor to nesses through the adoption of a "one-stop shop."16 the Lomé Agreement), which offers preferential quota-free and tariff-free access to the EU to various 14. In Honduras, Mozambique, Nicaragua, and Nigeria, key countries in Africa, the Caribbean, and the Pacific. findings have been integrated with World Bank Group projects. Nigeria's shrimp are purchased by large wholesalers 15. World Bank Group (2005c), "Kenya: Growth and Com- in the EU in a market dominated by seafood compa- petitiveness." nies from the Netherlands (Figure 3). These whole- 16. World Bank Group (2004b), "Kenya: Micro, Small and Medium Enterprise Competitiveness Project." salers purchase frozen wild shrimp from Nigerian 6 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Figure 3 Key World Farm Shrimp Suppliers to the catch as a preservative; and nets, winches, and wires that are needed to support maintenance. The Other materials are purchased abroad and brought in by con- 8% USA tainers that have to pass through cross-border formal- 4% ities in Lagos Port (Figure 4). Belgium France 5% Trawlers have a freezer and a cold store that main- 37% tains the temperature around ­20°C, which is the start of the cooling chain as the catch is processed and Spain 10% frozen at sea. The typical trawler is built abroad and is about 25 meters long with a capacity of 40 tons. With a crew of about 15 people, each trawler is able to make about five to six trips during the rainy season. At sea, the trawler continuously trolls, hauls, sorts (i.e., separates fish and other seafood from shrimp), Netherlands chemically treats, grades (by type and size), packages, 36% and freezes the catch. In this method, not much Source: Yee and Paludetto (2005). processing in terms of shelling or de-veining is in- volved compared with some international chains that entail more processing (and value-adding) activ- suppliers on a free on board (FOB) basis at the port ities. As each catch is hauled aboard the boat, the crew of Lagos, where the product is transferred to con- operates according to the HACCP program that com- tainer ships bound for Europe. A cold chain keeps the plies with health safety standards as accepted by the product frozen throughout the supply chain from European Commission.17 The successful adoption by trawling to final delivery, a procedure that meets the the Nigerian shrimp industry and approval by the EU Hazard Analysis and Critical Control Point (HACCP) countries of the HACCP plan is one of the key rea- standards required by EU authorities, and which is sons for market acceptance in Europe. critical for market entry in Europe. By the end of the voyage, the average catch is Nigerian suppliers of shrimp to the EU market are about 8 tons of shrimp and 12 to 15 tons of fish.18The represented by a trawling industry of about 20 com- trawler docks at privately operated jetties where panies. The largest companies are Atlantic Shrimpers much of the landside facilities were renovated or (70 trawlers) and Ocean Fisheries (21 trawlers). built by the shrimp fishing industry. The extension Medium-sized companies, such as Banarly Group of the cooling chain from sea to land is facilitated by (14 trawlers), also are very active. Other companies cold storage facilities built by the industry adjacent in the industry are mainly small, owning a handful of to the landing docks. The shipment of frozen shrimp trawlers each. The shrimp value chain in Nigeria has is quickly transferred by truck to the cold storage fa- a relatively short chain, unlike the textile or leather cility where it is kept until the consignment is ready sectors, although it is fully integrated in an interna- to be exported. Prior to exportation, the Federal De- tional supply chain. partment of Fisheries samples and analyzes the con- The primary activity in the value chain is the catch- signment to ensure that it conforms to international ing and processing of wild (white, tiger, and brown) health standards. Upon successful pre-shipment shrimp along the Nigerian coast, preferably during the rainy season from June to November. Each trawler is 17. Nigeria was included in the EU "Decision 2001/635/ stocked with fuel, stores, and supplies to last for EC-Part 1" list of countries in 2001. Under this arrangement, the about 50 days. The stores and supplies consist of Federal Department of Fisheries was designated the Competent Authority or central point of responsibility. consumables used during the voyage, primarily 18. The frozen fish, known as the by-catch, commands a low sodium metabisulfite, a chemical treatment applied value and is sold in the local market. C H A P T E R 1 . I N T R O D U C T I O N 7 Figure 4 Shrimp Trawling Value Chain for Nigeria Pre-Voyage Processing Storage & Stage Stage Distribution Stage Shrimp Shrimp Voyage Trawling & Storage & Preparation Processing Shipping Steps include: Steps include: Steps include: · Processing P.O.S. · Trawling · Berthage · Preparation for · Hauling · Dockside Handling & Receiving Intermediate · Sorting Drayage to Cold Storage Goods · Chemical Treatment · Cold Storage · Ocean Ship Berthing · Grading · Processing Sales Orders · Terminal Handling · Packaging · Preparati8on for Shipping · Import Border Clearance · Freezing · Pre-shipment inspection · Pick-up & Inland · Storage · Stuffing & Draying to Port Transport · Berthage · Export Border Clearance · Warehousing Storage · Terminal Handling & Loading Source: FIAS. "Nigeria: Value and Supply Chain Study." March 2005. Figure 5 Shrimp Value Added and Shipment Value Breakdown 16 2.3 14.9 14 0.5 1.8 12 1.1 10 naira) 0.9 4.7 8 (million alueV 6 0.2 4 1.4 1.9 0.2 2 0 d and Fuel Labor Admin. Profits lue Inputs Inboun Capital Va Repair Insurance Outbound Shipment Intermediate Logistics Overhead Logistics Maintenance Source: Yee and Paludetto (2005). Figure 5 illustrates the value chain shipment value breakdown. For this VCA, a medium-sized company was used as a case study to represent the value chain for the entire industry. The case study was based on an order from a customer in France for 15 tons of shrimp to be delivered FOB at Port Lagos at a value of about 15 million naira. The ordered shipment is equivalent to the catch of two trawlers out at sea on a voyage for 50 days. 8 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H inspection, the consignment is then stuffed into an ital charges, which account for almost 10 percent of empty reefer (refrigerated) container and drayed to the shipment value, are the third largest cost driver the Apapa container terminal in Lagos for customs in Nigerian shrimp operations. Annual nominal inter- clearance and transfer to a container ship. est rates at the time of the study were 19 percent com- Fuel, used for vessel operation and for the cool- pared with 13 percent in India, 5 percent in China, ing chain (a critical necessity for a perishable prod- and 12 percent in Bangladesh. uct adhering to international standards or HACCP), Despite the high cost elements, the value added is a key cost driver at 32 percent of the shipment by the shrimp chain covers both the primary input value. If the shrimp do not remain frozen, the prod- costs as well as the logistics costs and generates prof- uct will not be exportable. As a member of the Or- its. The profit rate is 18 percent of the value added. ganization of Petroleum Exporting Countries, Nige- This "success" is a turnaround for a previously declin- ria suffers from not only high fuel costs but also ing industry. sabotage of pipelines that cause enormous uncer- Two major factors have contributed to the sector's tainty in supplies. positive results. First, the nature of shrimp as a prod- Administrative overhead costs at 12 percent of uct is inherently high value. Second, the quality of the shipment value are high, but consistent with the rest product meets international quality standards as de- of the economy. The study revealed that a typical termined by HACCP. Incorporating HACCP quality and shrimp firm must adhere to 46 regulatory compliance production standards has given the Nigerian shrimp procedures. Of these, 29 procedures apply to all fishing industry access to EU markets, which are will- firms and 17 are specific to the shrimp sector.19 Cap- ing to pay premium prices for high-quality goods. 19. Please see Chapter 3, Tables 5 and 6 for a detailed list of the regulatory compliance procedures. 2 Value Chain Analysis-- the Key Elements Basic Framework The VCA framework centers around three major seg- Quantification of the value chain by measuring ments that describe each production link in the value monetary value and time is undertaken along the chain: source, make, and deliver.1 Figure 6 shows source-make-deliver construct for each production the framework for an extended cattle industry value activity. This measurement framework provides a chain. Each activity mapped on the value chain dia- consistent way to organize and classify cost and time gram can be represented by a cost breakdown. figures for comparison across diverse production This framework is flexible and can be applied to activities. The resulting monetary value and time value chains irrespective of their length. For exam- measurements are then further analyzed and trans- ple, the cattle industry represents a multistage pro- formed to derive metrics such as value added and pro- duction system and, as shown in Figure 6, the source- ductivity to identify performance gaps. Firm-level make-deliver framework can be applied to categorize performance is measured and inferred for the sec- the various products emanating from it. From a sup- tor as a whole. Establishing benchmarks for selected ply chain perspective, the cattle industry is linked to indicators against competitor countries, good prac- downstream industries in meat, leather, and dairy, for tice cases, and international standards can help in as- instance. The leather chain could be extended to sessing the relative competitiveness of the sector. the higher value-added leather shoe industry (or As shown in Figure 7, the value chain analysis typ- leather bags). In practice, the length of the chain being ically includes the following key elements or steps: analyzed depends on the objective and scope of the project in dialogue with the client. · Choose the sector(s) to assess; · Analyze the market; · Map the value chain; 1. The source-make-deliver construct is an adaptation of the · Measure the performance of the chain and estab- Supply-Chain Operations Reference (SCOR) model that was de- lish benchmarks; veloped by the Supply Chain Council and integrates business · Analyze performance gaps (focusing on govern- process reengineering, benchmarking, and process measurement into a cross-functional framework for use as a management tool. ment and market failures); 9 1 0 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Figure 6 Extended Value Chain of Cattle Industry Food Processing Source Make Deliver Source Make Deliver Source Make Deliver li Cattle Leather Shoes Leather Meat Policy Institutions Infrastructure Source: Subramanian (2007). · Establish recommendations for policy changes The relevant issues to examine at this stage in- with potential downstream implementation. clude: import tariffs, import restrictions, delays in ob- taining raw or intermediate materials, the share of im- Each element is discussed in more detail in the sec- ported versus domestic sources for materials, tions that follow. Several of these elements--choos- subsidies, applicable taxes (including value-added ing the sector, analyzing the market, measuring the taxes), competition policy, transport and trade logis- performance of the value chain performance and tics. Costs and the time to source materials should establishing benchmarks--require data collection. be measured where applicable. Some data is available within the public domain and from existing sources, whereas other data require tar- geted field interviews. Also, while the steps shown Make in Figure 7 are laid out in a discrete fashion, a fair level of interaction occurs between the various elements. To make, as the word implies, refers to the processes necessary to transform raw or intermediate inputs into a finished product. This finished product either Source becomes an intermediate product that is further transformed (e.g., yarn, which may be used to make To source refers to the process of procuring goods and fabric), or the final product a consumer purchases services required as inputs in the main production (e.g., leather footwear).2 process for a product. This product will either become an intermediate input in the next stage of production 2. It is also important to account for any by-products that re- or will be sold to the consumer as a final good. sult from production that can be sold or disposed. C H A P T E R 2 . VA L U E C H A I N A N A LY S I S -- T H E K E Y E L E M E N T S 1 1 Figure 7 Key Elements of Value Chain Studies Measure Sector Market Value Chain Analysis of Performance & Choice Analysis Mapping Performance Gaps Benchmark International & Government failures Domestic Market failures · Contribution to · Industry trends · Process Activity · Factors costs · Taxes, Tariffs and Non-tariff GDP · Market shares/ Breakdown · Transaction barriers · Private trends · Industry costs · Infrastructure/utilities service Investment · Price trends Structure · Value added quality, price · Policy · Competition · Regulators & · Productivity · Regulatory barriers & Relevance policy Commercial enforcement · Employment · Links to global Agents · Administrative barriers Potential value chains interaction · Market structure & Competition · Local Value · Technological policy Added trends · Factor market rigidities · Implementation · Global Policy · Price restrictions/Subsidies potential trends (e.g.,Trade) · Product quality and standards PROJECT IMPLEMENTATION Source: Subramanian (2007). Accounting for the monetary value and time for It is also important to obtain information about key activities in the make phase of VCA should include policy issues affecting availability and productivity of the primary factors listed below (note that cost and the factors of production. For example, labor costs time associated with raw and intermediate inputs need to be supplemented by information about labor are taken into account as part of the source process): mobility, hiring/firing practices, labor laws and regu- lations, union activity, and labor productivity measures. · Land · Labor (not including administrative overhead costs) Deliver · Capital charges (interest charges, depreciation, and returns to capital) The deliver phase of VCA examines the moving of fin- ished products or services to either the next produc- Data on the following secondary items should tion activity (e.g., printed fabric for apparel) or to the also be included in accounting for the make seg- final consumer (e.g., shirts). This segment includes ment of a VCA: the following activities: · Cost and quality of utilities (power, fuel, water, · Preparation for outbound shipping (clearing telecommunications, etc.) agents, clearance documents, etc.) · Administrative overhead (time to address and · Pre-shipment inspection manage red tape/bureaucracy, management time · Export border clearance (customs, other govern- for administrative matters, unofficial charges, other ment clearance) overhead charges) · Port and terminal handling · Equipment (including repair and maintenance) · Outbound line-haul transport 1 2 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H · Capital carrying charges in transit b. Does the product value chain involve less- · Shelf loss in transit/storage developed regions in the country? · Wastage, returns, price markdowns 7. Does the sector offer the potential to establish · Emergency shipment or change policy with broad impact? Would these changes in policy improve the overall business environment for private sector development in Sector Choice the country? 8. Are there any indications about the sector's Determining the sector or sectors (or subsectors) readiness for reform and change? on which to perform a value chain analysis is a com- 9. Is there enough demonstrated support for pol- plex decision that requires balancing multiple inter- icy reform? ests and objectives. In practice, a request for a VCA 10. Are international benchmarks available? from a client country or from another WBG unit is accompanied by suggestions for sectors to assess. The The criteria for choosing a subsector or product for ultimate sector or subsector choice is usually an it- which to perform a VCA directly follow from the pa- erative process that occurs through discussions with rameters that determined the initial sector choice. If the client government, private sector stakeholders, the focus is on the agribusiness sector, for instance, and donor agencies including the WBG and the task it will be necessary to know which agro-based prod- team (including other actors where appropriate). ucts are most important to the country. As a case in Although the questions listed below are not ex- point, in Indonesia the government identified a num- haustive, they could provide a useful basis for choos- ber of agribusiness product lines as vital to the coun- ing which sector(s) to assess.3 The weight assigned try's export growth strategy. The answers to several to any of the questions will depend upon the specific of the questions listed above indicated that farmed country context and the objective and scope of the shrimp would be a useful subsector on which to focus project. because it would offer significant policy insights for the government's agricultural export strategy. 1. What is the underlying objective of the proposed Although a detailed, quantitative VCA focuses on project? How does it relate to other relevant a subsector or product, the analysis must be placed projects in the country? within the context of the entire sector. For instance, 2. How does the sector choice fit with the overall if one chooses to perform a VCA of horticulture, country strategy? and pineapple is the product for the detailed analy- 3. What is the sector's contribution to the country's sis, it is important for the task team to present the GDP? What is the growth potential of the sectors pineapple value chain in the context of the entire hor- (globally and nationally)? ticulture industry in that country (and external mar- 4. What is the sector's contribution to the country's kets where appropriate). The broader sector issues exports? must be covered in the market analysis stage. 5. Does the sector have the potential to attract (further) private investments? 6. What is the potential within the sector to re- Tip: Economic data facilitates sector choice; it also duce poverty? provides pertinent background information re- a. Does this sector offer significant current or po- lating to the business environment, which is use- tential employment generation? ful in interpreting the VCA results where firm performance is linked to value-adding activities 3. Desk research using various data sources may answer many and public sector policies and responsibilities. of these questions. C H A P T E R 2 . VA L U E C H A I N A N A LY S I S -- T H E K E Y E L E M E N T S 1 3 Market Analysis 12. Enforcement of property rights and regulations and the need for informal payments, which might A value chain analysis requires a solid understanding include an assessment of the following: of the subject country's standing in the world econ- i. Level of foreign direct investment in the omy using trends in production, consumption, ex- industry and its trend ports, imports, prices, macroeconomic performance, ii. Sector's share in gross domestic product monetary indicators, sectoral contributions to GDP, iii. Sector's share in exports general policy and trade policy regime, and so on. iv. Percentage of employment accounted for by After the sector or subsector has been determined, the sector the next step in a VCA is to conduct a market analy- v. Level of vertical integration of the industry sis to obtain a strong basis for understanding indus- vi. Assessment of informal activity in the try trends and issues both in that country and in the industry/sector international market (See Box 1 for relevant ques- tions). Some of the factors that might be examined Most market analysis data can be obtained from in this phase include the following: secondary sources such as published statistical data- bases, country or commodity reports, and through 1. Market trends (global and national): values, vol- direct interviews with domestic industry and trade as- umes, market growth, and share sociations and relevant government agencies. 2. Price trends of the final product, and the main raw or intermediate inputs 3. Current structure of the industry and market: Tip: Use domestic and international industry competition levels and entry-exit barriers associations and industry specialty publications 4. Key suppliers and key markets: linkages with such as those published by the United Nations global value chains, which might include a quick Industrial Development Organizaiton (UNIDO) assessment of the following: and the International Trade Center. Conduct in- i. What is the competitive advantage of each terviews with importers, retailers, and branders. major producing country? ii. What is the share and potential of the In addition to understanding market trends in domestic/regional market? the sector, it may also be useful to ask selected ques- 5. End markets: composition, structure, ease of tions to obtain an understanding of the demand side entry, and reward structure of the issues through a buyer's survey (Box 2). A 6. Market channels: the most effective and efficient buyer's survey is particularly important for value channels, and the types and efficiency of com- chains that are buyer-driven, such as apparel (buyers munication linkages such as Wal-Mart, Target, The Gap, and JC Penney) 7. Market niche possibilities: growth potential, ex- or furniture (a buyer such as Ikea). port potential, or both 8. International benchmarks used by the industry 9. Required quality and technical standards for Value Chain Mapping achieving domestic and international competi- tiveness A value chain map allows one to depict all activities, 10. Key technological trends actors, and relationships among segments of the 11. International or regional policy: whether the chain, and the interactions between producers and product or service is covered by preferential intermediaries. trade agreements between certain countries or Information from a market analysis is used in con- different trading blocs junction with detailed firm data to understand the 1 4 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Box 1: Sample Market Analysis Questions 1. What are the global market trends over time (in terms of 12. Does the sector have a large domestic/regional market? value, volume)? 13. Does the state of physical infrastructure/utilities impede the 2. Who are the key global producers and suppliers? Which are productivity of the sector? the major importing countries? 14. What is the market structure of the industry (i.e., monopoly, 3. How has the world price of the product changed over time? oligopoly, perfect competition, monopolistic competition)? 4. How has the world price of (raw and intermediate) inputs 15. Is there a dominant firm in the industry or are there several? to this product changed over time? 16. Are there entry barriers to new firms? 5. What is the level of foreign direct investment in this indus- 17. What is the level of vertical integration of the industry? try? What are the trends? 18. What is the market share of the following along the value 6. At the country level: chain: (i) multinationals; (ii) domestic firms in the formal · What percentage of GDP does this sector constitute? sector; (iii) informal producers? What is the sector's share of exports? What is its share 19. Is there a level playing field among producers and firms (e.g., of foreign direct investment? small vs. large, foreign vs. domestic, formal vs. informal) on · What percentage of employment is accounted for by issues such as: the sector? · Enforcement of taxes, import tariffs, product standards, · What is the country's position in the global market? etc. · How has the country market share changed over time? · Access to formal sources of financing (banks) · What is the sector's potential for growth and exports? · Access to key public utilities (e.g. energy)? 7. In what trade policies does the country participate? Do 20. Who are the new entrants in the sector? Who has left the any regional partners share special trading rights? market? Why? Are there licensing restrictions for new en- 8. Are there applicable specific product quality standards or trants? Do transparent criteria exist for allocating licenses required processing standards? and permits? 9. What competitive advantages do major producing nations 21. How disaggregated is the global value chain (e.g., trade to have? What competitive advantage does this country have? global sales ratio; outsourcing trends)? 10. Does the sector serve a niche market? 11. Does the country have preferred access to key global markets? sourcing, production, and delivery segments of an in- · The framework for allocating costs, rewards, dustry at micro levels. (See also Box 3). This process rents, and value added to the appropriate chain of obtaining disaggregated information about a firm participants. (or a farm) or about a number of firms (or farms) and subsequent extrapolation to an industry or sector al- Tip: Firm-level business process reengineering lows one to better understand: studies and industry association benchmarking studies can be used to develop a value chain · How a firm (or a farm) is linked to its industry, map. region, country, and global chain, thus facilitating an analysis of the opportunities that the firm (or farm) faces in upgrading its processes and strate- The figures that follow illustrate a value chain gically positioning itself in the value chain map for coffee production in Honduras. Figure 8 · The relative strength of the segment in the chain shows the physical production process; Figure 9 (e.g., yarn spinning in a textile-apparel chain) shows the structure of the coffee industry; Figure 10 · Key institutions, intermediaries, service providers, illustrates the key regulatory and commercial agents and their interaction in the coffee industry and how they interact. C H A P T E R 2 . VA L U E C H A I N A N A LY S I S -- T H E K E Y E L E M E N T S 1 5 Box 2: Sample Questions for Buyers 1. What are the criteria that drive your decisions to obtain · Fast speed to market products from new markets/countries? How important is · Sophisticated level of services (i.e., full package for each of the following? apparel) · Political and economic stability · High labor standards · Labor costs · Good product mix · Workforce skills · Low average defect rate · Labor productivity · Short order to delivery cycle time · Geographic proximity to markets · High flexibility in size and scale · Trade agreements 3. What is the contract length you usually set with your · Corruption suppliers? · Social and environmental standards and practices 4. Who are Country X's main competitors in Sector A? How does · Government regulations and administration Country X rate against other competitors or key interna- (bureaucracy) tional exporters? 2. What criteria do you consider in deciding from which com- 5. How do you assess quality? pany or country to obtain products? · Standards set by your company · Previous established buyer-supplier relationship · International standards · High workforce skills · Other metrics (specify) · Low cost of production other than labor 6. What is your policy on defective or low-quality products? · High workforce productivity 7. What is your policy on delayed delivery? · Low labor costs 8. What type of financing terms do you demand from suppliers? · High product quality Box 3: Sample Questions for a Mapping Exercise 1. What is the "cradle to grave" process map of the industry? 2. What are the by-products created in the industry? What is the value of these by-products? 3. Differentiate between production oriented for export and that for domes- tic markets. 4. Differentiate between small-scale vs. large-scale enterprises. 5. What are the key subsectors that drive value in the industry? 6. Who are the key intermediaries? How many of these are formally regis- tered enterprises? 7. What are the contractual norms in the firm/sector at the buying and sell- ing ends? · Ordering procedures · Payment terms · Inspection requirements 1 6 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Figure 8 Value Chain Mapping of Activities: Coffee in Honduras Typically performed by exporters Typically performed by medium to large coffee farms Export Typically performed in coffee farms Intermediary · Marketing Humid Dry Threshing / · Quality Seed Farming Harvest Process Process Selection control Retailers · Logistics-- or · Land · Shade · Cut of · Wet milling transport to port, · Quality · Thresing preparation regulation coffee · De-pulping sea freight, control · Selection · Land · Trimming grapes · Fermenting outbound · Drying · Packing analyses · Cleaning · Transport · Washing logistics (mechanical (sacks) and · Land analysis of grapes · Aerating drying) Wholesalers sampling and sampling · Drying · Cooling Toasting to · Fencing (for fertilization · First · Storage · Toasting · Purchase/ plan) selection sale · Selection Activities transport of · Fertilization · Packing · Grinding coffee plants · Fungicide (sacks) (optional) Direct Key · Irrigation application · Storage system/ · Phytosanitary Packing materials control · Planting of · Packing coffee trees · Planting of Domestic shade plants Market · Marketing and Sales Source: World Bank Group (2005d), Honduras Coffee Value Chain. Figure 9 Honduran Coffee Value Chain Dynamics: Structure of Industry + lH High Number of Participants Low ­ Specialty Estate Larger Producer Small Holders + Wet Mill + Wet Mills Countries Exporter Broker / Domestic Wet Mill Trader Producing Dry Mills International Trader Office Coffee Service Consumers Distributor Countries Restaurants / Regional / National Importer / Cafes Dry Roasting Company Broker M tM yE Consuming ills Roastingl Company Localil / Micro stat Retailer / Supermarket Source: World Bank Group (2005d), Honduras Coffee Value Chain. C H A P T E R 2 . VA L U E C H A I N A N A LY S I S -- T H E K E Y E L E M E N T S 1 7 Figure 10 Honduran Coffee Cluster: Interaction of Stakeholders Support and Support Services Producer Regulation Transport Organizations Authority Suppliers AHPROCAFE Financial Laboratories Services FHIA, CESCO Fuel ANAHCAFE Security / Guard Research LA CENTRAL Fertilizer Companies FHIA, IICA UNIOCOOP IHCAFE Sacks Consumers FCN Bags Retailers CNC Equipment Wholesalers SAG & Machinery SECRETARIA Coffee Producers Toasters TOSCAFEH DE AMBIENTE International Intermediares Commerce Pr Exchange Sack od Exporting Importers Cooperatives Traders Equipment Exporters ­ National/ & Machinery International Industrials Green Seal Maintenance Wholesalers Works Sea Freight Services Retailing Services / Insurance AHDECAFE Consumer Source: World Bank Group (2005d), Honduras Coffee Value Chain. 3 Measuring Performance and Establishing Benchmarks Metrics A qualitative mapping process of an industry or sec- Interpreting cost and time in a meaningful way and tor is followed by cost and time measurements of the then relating it to policy and institutional factors re- disaggregated segments of the value chain (Box 4). quires establishing benchmarks and conducting a The performance of an industry or sector may be performance gap analysis. It entails tracing the over- explained by: examining various activities in the pro- all performance of the supply chain and sifting duction chain and comparing these with national or through the layers of qualitative and quantitative in- international benchmarks; identifying gaps in per- formation (obtained from mapping the value chain; formance; and probing into the underlying policies, computing time, cost, added value and productivity; institutions, and infrastructure-related inefficiencies benchmarking; and drawing out policy insights) to that directly affect productivity and competitiveness. reveal the underlying reasons for the gaps, which The metrics used to measure the performance of often point to priorities for action. These reasons a value chain include: could include policy distortions, institutional ineffi- ciencies, infrastructural gaps, factor market rigidi- 1. Cost ties, and market failures. This stage of analysis essen- 2. Time tially involves compiling and evaluating information 3. Value added and data from multiple sources to determine cause- 4. Productivity and-effect relationships. The tracing process needs a systematic approach Cost and productivity are the underlying factors with a starting point that will then be linked to crit- in determining the competitiveness of an industry. ical areas that underlie specific causes linked to pol- Costs encompass both monetary costs (such as raw icy distortions, institutional inefficiencies, infrastruc- material costs, input costs, and utility costs) as well tural gaps, factor market rigidities, and market failures. as transactions costs (such as time delays, red tape, It is critical to choose the right starting point--and and regulatory barriers). therefore the appropriate metric, which should help 1 9 2 0 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Box 4: Cost and Time Measurements Disaggregating costs along the value chain in transform- vices, communications, energy) to identify the causes of ing raw and intermediate inputs into a final product helps changing cost pressures. to identify key cost drivers that influence the final landed Similarly, time measurement of disaggregated activi- price of the product. The cost drivers can be examined and ties along the chain provides significant insights on per- linked to macroeconomic factors (e.g., interest rates, for- formance, and facilitates in identifying problem areas. eign exchange rates), microeconomic factors (leasing Time measurements can also be monetized through mea- costs, wage rates, import bans, export subsidies, border sures such as carrying charges, storage and warehous- controls), and social factors (labor disruption) as well as ing costs, and inventory costs. physical infrastructure and utilities (roads, transport ser- in evaluating the overall competitiveness of the chain. · Ministry of agriculture A useful metric in this context that yields a tractable · Licensing boards measure is the shipment value or, more specifically, · Quality assurance agents the FOB price of a consignment at the point of trans- fer to the buyer. (See also Box 5.) Sources for obtaining information on supply chains, The cost and time measurements for the chain of logistics, and trade transactions include the following: activities usually follows the source-make-deliver con- struct. Although some of this data may be obtained · Freight forwarders/multimodal transport operators through prior sector studies, the detailed steps that · Shipping line and shipping agents occur in the production and logistical process are · Transport carriers (truck, rail, air) typically best obtained through direct interviews. Any · Port authority (sea/air) relevant secondary data (e.g., prior studies) can be · Customs services used to validate and compare the current study infor- · Commercial banks, exchange control agencies, mation. Within a firm or business, the following indi- the central bank viduals are potential candidates for the interviews: · Pre-shipment inspection agencies · Chambers of Commerce · Business owners/proprietors · Departments of trade/external trade · Operational managers/production supervisors · Material procurement managers/supervisors Value added and productivity are useful measures · Product delivery managers/supervisors to show whether a firm is competitive in its current · Marketing managers/supervisors operating and regulatory environment. Value added · Financial managers is defined as the value of output at market price (fac- tory gate price, or more often, the FOB price) minus Other sources for obtaining information about the value of all intermediate inputs purchased from industry policies, regulations, institutional agencies, other firms. Value added thus represents the contri- and technical standards include the following: bution of, and payments to, the primary factors of pro- duction and can be defined as below: · Suppliers · Industry associations Value Added = · Ministry of trade or commerce FOB Price of Shipment ­ Value of Intermediate Inputs (ex-works) · Ministry of industry C H A P T E R 3 . M E A S U R I N G P E R F O R M A N C E A N D E S TA B L I S H I N G B E N C H M A R K S 2 1 Box 5: Methodology Because value chain data is computed on the basis of a mation from several sources to come up with a represen- shipment or consignment value, the methodology for as- tative value chain. sessing cost and time essentially requires a case study ap- Depending on the structure of a subsector or an indus- proach. However, because the objective of the study is not try, more than one value chain map and quantitative dis- to advise a single company but to understand competitive- aggregation may be required. For instance, Kenyan cof- ness from the perspective of a subsector or an entire sec- fee is produced by both small producers and large tor, one must check the consistency of the data from the commercial plantations. The cost structure and the mar- firm that is the object of the case study by conducting in- ket and business environment that small producers face terviews with other firms, industry associations, service are very different from those that plantations face. Thus, providers, and government agencies. The methodology in- to understand the coffee sector it is important to differen- volves comparing the data from the case study with infor- tiate the analysis for the two types of production models. The more value a firm can add to a product for a Tip: Should transport and logistics costs be in- given primary and intermediate cost configuration, cluded in value added computation? The contract the greater its profitability. The potential to add value of sale will specify the point of ownership trans- to a product lies in a firm's ability to keep raw and fer through the specified INCOTERMS and this intermediate input costs as low as possible and to in- will in turn define who bears the costs of trans- crease the price of its finished product in the mar- port and logistics. The terms of trade used for ket. Given that most firms in developing countries analysis should be those that have been deter- are price takers, value added therefore is dependent mined to be most prevalent or typical in the sec- on the following two factors: tor and country. 1) Productivity: Greater productivity enables higher levels of final output given a particular configu- duction are transformed into output. Traditionally, ration of inputs. Productivity is one of the criti- productivity measures have focused on labor and cal factors in determining competitiveness. capital. More specifically, examples of labor produc- 2) Costs of production: Costs of production are tivity include output per labor hour worked or value affected by policies, institutions, and the indus- added per labor hour. Examples of capital productiv- try structure that governs the supply of primary ity include return on assets (ROA) or return on eq- and intermediate inputs. These could include uity (ROE).1 Other productivity measures can be de- tariffs on imported inputs, poor logistics that rived for factor inputs. For example, in an agricultural cause delays in import procurement, licensing re- industry, yield per hectare (for fruit and vegetable strictions that impede lower-cost domestic sup- crops, for example) and feed-conversion ratios (for plies or the poor enforcement of standards that shrimp and livestock, for example) are computed as affect the cost and quality of inputs; labor costs; standard productivity measures. poor utility services; and so on. The basic measurement units that should be com- 1. Productivity metrics are analyzed at the firm level. These puted as part of a value chain analysis include those measures also apply to macroeconomic analyses such as those for listed in Box 6. (See also Figure 11.) an entire industry or a nation. For a discussion on sectoral pro- ductivity measures see Palmade (2005). For national productivity Productivity measures the efficiency with which measures, see OECD (2001), Pilat and Schreyer (2004), and primary and intermediate inputs and factors of pro- Schreyer (2001). 2 2 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Value Adding Total Value Added Box 6: Shipment Value Metrics Efficiency = (Labor Costs + Depreciation) The value added of an industry or sector is a use- · Intermediate inputs as a percentage of shipment value (or FOB price) ful measure for understanding the sector's potential · Value added as a percentage of shipment value as a source of growth for the overall economy. "Value · Value added as a percentage of the total wage added as a percentage of GDP" and "value added as costs a percentage of exports" are proxies for the growth · Logistics costs as a percentage of shipment value of an economy and could be considered key private · Inventory cost as a percentage of shipment value sector development indicators. These also facilitate · Cost of factor inputs: the measurement of productivity. Examples include Land as a percentage of shipment value "value added per labor hour" and "value added per Capital as a percentage of shipment value unit of capital invested." Labor as a percentage of shipment value Profit margin is another useful indicator of a sec- · Administrative overhead as a percentage of tor's performance and can be represented by the for- shipment value mulae below: · Cost of utilities as a percentage of shipment value · Repairs and maintenance as a percentage of shipment value (FOB price of shipment) minus · Profit as a percentage of shipment value (the costs of raw and intermediate inputs) minus (costs of primary inputs) minus (costs of transport/logistics services)3 or Tip: Physical measures of productivity such as (FOB price of shipment) minus (total cost of spinning output per worker hour or packing production) minus (cost of delivery) rates per worker day in the textile industry do not directly come out of cost and time measure- ments, but they should be collected through Benchmarking: Uses and Challenges the interview process. Benchmarking of key indicators along the value chain helps to detect performance gaps and identify the Whereas labor productivity can be computed with main constraints to a firm's competitiveness. More data collected for the activity analysis, capital and eq- importantly, it helps to prioritize constraints that di- uity efficiency analyses require data on average asset rectly affect the overall competitiveness of the value values and average equity values, which likely will be chain. Benchmarking is often complicated because contained in financial statements if they are available. reliable comparable data is often not readily available The ability to compute inventory turnover and inven- for all sectors and products. In practice, it is possi- tory age for a consignment depends on being able ble to identify key data points on which benchmarks to obtain data to compute average inventory for the can be obtained through industry experts and sec- period in question. ondary sources including research papers; think- Value Adding Efficiency is a percentage measure- tanks; and agencies such as the World Trade Organi- ment that combines two input factors: labor costs and zation (WTO), the Food and Agriculture Organization equipment costs (as measured through deprecia- tion). It is calculated using the following formula:2 3. Primary inputs include utilities, equipment maintenance, and administrative overhead costs (in addition to labor, capital, 2. DTI, "2005 Value Added Scoreboard." and land). C H A P T E R 3 . M E A S U R I N G P E R F O R M A N C E A N D E S TA B L I S H I N G B E N C H M A R K S 2 3 Figure 11 Factor Productivity Measures Productivity Metrics Labor Productivity · Output per unit of labor hour · Shipment or consignment value per labor hour · Value added per labor hour · Shipment or consignment value per labor cost · Capital and equity efficiency · Output per labor hour · Inventory turnover · Value added per labor hour · Yield per unit of land (for agricultural analyses) · Feed conversion ratio (aquaculture and livestock analyses) · Input conversion ratio Capital Efficiency and Productivity Inventory Metrics · Asset turnover ratio = Sales/average value · Average inventory levels · Equity efficiency = Sales/average equity · Age of inventory = 365 days/Inventory turnover Capital productivity measures from a financial perspective are return on equity and return on assets. They are expressed respectively as net income dividened by average total equity and net income divided by average total assets. Figure 12 Sample Benchmark Indicators for a VCA Value-Added Indicators · Value added as a percentage of GDP Trade Logistics Indicators · Value added per unit of labor hour · Logistics costs as a percent of shipment value · Value added per unit of capital invested · Total time to process an import transaction · Total time to process an export transaction · Customs clearance times Factor Input Indicators · Import logistics cost · Export logistics cost · Wage/labor hour · Number of signatures required per trade · Working hours/day (or week) transaction · Output producted/labor hour · Percentage of import or export containers · Shipment value/labor hour inspected · Cost (US$)/kwh · Interest rates 2 4 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H fabric) in Kenya are almost three times those in Hon- Box 7: Sample Questions for Establishing duras. Both Kenya and Honduras are subject to trade Benchmarks agreements with the United States, through the African Growth and Opportunity Act (AGOA) and · What international benchmarks are used in the the Central America Free Trade Agreement (CAFTA), industry? respectively. · How do the factor costs (for labor, capital, and key In addition to Kenya's location, which increases inputs) compare with best practice case firm in ocean freight costs, two main underlying factors help the country, the region or the world? · How does the productivity (of labor, capital, and key to explain the cost differences: (i) trade logistics inputs) of national firms in the sector compare with costs for imports at US$2,325 per twenty-foot equiv- best practice case firm in the country, the region alent unit (TEU) in Kenya are 3.5 times that of Hon- or the world? duras5; and (ii) the average tariff on imported fabric · How does the capacity utilization of domestic firms is 17.5 percent in Kenya compared with 9.5 percent in the industry compare with best practice case firm in Honduras. in the country, the region or the world? It might be expected that for a labor-intensive · How does the technology in the sector compare sector such as apparel, Kenya would have some com- with best practice case firm in the country, the parative advantage given that Kenyan wages (at region or the world? US$9.40/labor day) are on average much lower than in Honduras (US$12/labor day). However, in mone- tary terms the labor cost for a t-shirt in Kenya is still (FAO), United Nations Industrial Development Or- higher than in Honduras. This is driven by lower ganization, International Trade Centre, and the World labor productivity. On average, Honduran firms pro- Bank Group. (See also Box 7.) In this regard, this re- duce twice as many shirts as Kenyan firms assuming port contributes to the benchmarking process by all other factors constant, a key factor in Honduras' providing a consistent approach for the analytical greater competitiveness. framework and use of appropriate metrics, and in Overhead costs in Kenya (at US$0.57 per t-shirt) identifying a set of indicators that might be useful to are more than three times higher than in Honduras plan for early in the project cycle (Figure 12). (at US$0.16 per t-shirt). This cost disparity is partly A comparison of the Kenyan and Honduran ap- reflected in the time senior management in com- parel industry value chains illustrates how bench- panies spends addressing government regulations marking helps to prioritize critical constraints in the (8 percent of their time in Honduras compared with 14 percent in Kenya). Also, the average time a sen- value chain (Figure 13). It also reveals interesting in- ior manager in Kenya spends in meetings with tax of- sights into how policies and institutions play a cen- ficials is almost double that in Honduras. tral role in affecting the overall competitiveness of the industry in the two countries.4 Finally, outbound logistics costs (excluding ocean transportation costs) in Kenya are almost four times At US$3.60, the FOB price of a plain cotton t-shirt those in Honduras. The cost difference is further from Kenya is more than 2.5 times the FOB price of exacerbated by the quality of product as reflected in a similar t-shirt from Honduras. What explains the dif- reject rates of more than 3 percent in Kenya. The ex- ference in FOB price of a similar product? Benchmark- ample discussed here clearly illustrates that geogra- ing of the individual cost elements in the value chain phy alone is not driving the somewhat lower com- of the two production processes reveals that Kenya petitiveness of the Kenyan apparel industry in U.S. has higher costs of raw and intermediate materials, markets, nor are lower average labor costs compen- labor costs per unit of apparel, overhead costs, and sating for other overriding constraints. logistical costs. Raw material costs (mostly imported 5. World Bank Group (2006), Doing Business 2007: How to 4. Subramanian and Matthijs (2007). Reform. C H A P T E R 3 . M E A S U R I N G P E R F O R M A N C E A N D E S TA B L I S H I N G B E N C H M A R K S 2 5 Figure 13 A Comparison of the Kenyan and Honduras T-Shirt Value Chains SOURCE MAKE DELIVER FOB Cost Per Import Raw Material Labor Cost / Outbound Utilities Overheads T-Shirt Dependence Costs T-Shirt Logistics Kenya $3.60 65% $2.30 $0.40 $0.05 $0.57 $0.28 Honduras $1.10 80% $0.80 $0.25 $0.03 $0.16 $0.06 High Tariffs: Lower Wages Offset by Speed to Market: Honduras: 95% Lower Labor Productivity Honduras: <15 days Kenya: 17.5% Honduras: $12.00 / labor day Kenya: >30 days Kenya: $9.40 / labor day Impact of Rules of Origin High cost of Export Logistics: Exacerbated by location and Honduras: 45­50 shirts / day Honduras: $500 / TEU therefore transportation costs Kenya: 20­25 shirts / day Kenya: $1980 / TEU High Cost of Import Logistics Regulatory Barriers High Incidence of Rejects: Honduras: $670 / TEU % of Senior Management Honduras: <1% Kenya: $2325 / TEU Time on regulations: Kenya: >3% Honduras: 8.5% Total Import Logistics Time: Kenya: 14% Honduras: 39 days Kenya: 45 days Days spent in meetings with tax officials: Honduras: 2.53 Kenya: 4.1 Source: Subramanian and Matthijis (2007). Cost, Quality, and Supply of Raw and For instance, in Kenya's apparel industry, high im- Intermediate Materials port tariffs and poor logistics drive up the cost of im- ported fabric. This increases the costs of apparel Policy and market failures often lead to high costs, production. In Indonesia, the imposition of a 12 per- poor quality, and difficulties in obtaining raw and in- cent VAT on all imported material that takes an av- termediate materials. Raw and intermediate material erage of 1.5 to 2 years to reclaim seriously constrains costs are often driven by: a firm's working capital. This long turnaround time for seeking VAT reimbursement comes with signifi- · Trade policy distortions such as import bans or cant bureaucratic hassles and implies a cost equiva- tariffs lent of 9 to14 percent of total profit for a typical · Regional trade agreements that have rule-of-origin medium-sized textile export firm.6 requirements · Anomalies in product standards that may provide disincentives for using domestic sources. 6. FIAS (2006b). 2 6 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Box 8: Questions to Consider when Assessing Cost, Quality, and Supply of Materials 1. What percentage of industry inputs (i.e., raw materi- 7. Are the criteria for allocation of licenses and permits als) is imported? How do the price and quality of im- transparent? How long does it typically take to obtain ports compare with domestic raw or intermediate ma- an import or operational license? terials? 8. What are the contract terms between the buyer and 2. What kinds of protective measures such as tariffs, seller of intermediate inputs? What is the structure of duties, or bans exist on imports? the prevalent buying relationships in the industry? 3. What is the quality of the sourced inputs? What are 9. What is the average lead time for sourcing raw or in- wastage and defect rates? termediate material? Is there variability in lead time? 4. What kinds of certification do suppliers of inputs 10. What are the inventory holding costs? What part of the require? inventory holding costs are due to firm inefficiency ver- 5. Are standards on quality of imported inputs enforced? sus policy and market factors outside a firm's control? Are standards of domestic production of inputs en- 11. How much time does management spend on locating forced? Are national product quality standards aligned and obtaining supplies? with international standards? 12. How often do disruptions occur in supply and why do 6. What kinds of policy restrictions (bans, licensing they occur? What alternate methods for acquiring in- restrictions) affect the domestic production of this puts are in place? What is the associated cost? material? Poor logistics may result in a firm not being able banned chemicals, poor equipment and application to obtain the raw and intermediate materials it needs techniques, poor disposal practices, uneven quality in production in a timely manner, which means that of agrochemicals, absence of mixing guidelines, and the firm must hold large inventories, which in turn the lack of surveillance and monitoring of quality ties up its working capital. Some materials may be of standards.8 poor quality due to low standards or poor enforce- Monopolistic or oligopolistic suppliers supported ment of standards that are then carried through to by protectionist policies can impose entry barriers to the finished product, affecting the producer's abil- newer and more efficient firms, and these policies ity to command a premium price in the market. For may drive up the price of raw and intermediate ma- instance, poor husbandry practices and inadequate terials. Restrictions on licenses for domestic produc- abattoir regulations and enforcement mechanisms ers may play a big role in creating price distortions made it difficult for the leather processing industry in the input market, which can lead to high admin- in Nigeria to obtain high-quality skins, which lim- istrative costs. For example, shrimp producers in In- ited the growth of high-quality leather production.7 donesia are required to renew their import permits In another example, the main issues affecting the every six months.9 cut flower industry in Kenya are associated with the Relevant questions to pose at this stage of the high cost of agricultural inputs--specifically, sprays VCA would assess non-tariff barriers, import tariffs, and fertilizers. These are usually imported and not quotas, delays in obtaining raw or intermediate ma- sourced from domestic firms due to poor enforce- terials, the share of imports versus domestic sources, ment of quality standards in Kenya. Small and subsidies, applicable taxes including VAT, and com- medium-sized enterprises (SMEs) in the cut flower petition policy issues. These questions should at- industry faced a range of problems in using agrochem- tempt to measure the cost and time of these items icals, including a lack of information on approved or where applicable (Box 8). 8. World Bank Group (2005c). 7. Yee and Paludetto (2005). 9. FIAS (2006b). C H A P T E R 3 . M E A S U R I N G P E R F O R M A N C E A N D E S TA B L I S H I N G B E N C H M A R K S 2 7 Box 9: Questions related to Factors of Production 1. What labor market regulations affect sector productivity? 10. What percentage of investment capital is obtained through 2. How do the personnel training programs of the average firm formal financial institutions? From retained earnings? From compare with best practices in the sector? personal/family sources? From informal lenders? 3. How do issues related to corporate social responsibility 11. Do input suppliers provide the inputs for cash or on credit? (e.g., environmental standards, child labor laws) affect the 12. What are informal sources of financing? What are the terms sector? and conditions if funds are obtained from an informal 4. How do labor and capital productivity of the average firm source? Do they charge any interest, and if so, how much? compare with best practice cases in the country, in the re- 13. Are other financial services required, such as insurance? gion, in the world? Are such service providers available? 5. How do the costs of labor, capital, and other key inputs of 14. How do land market issues such as restrictive zoning laws, the average firm compare with best practice cases in the administrative barriers to land registration, lack of clarity in country, in the region, in the world? titling, and unclear leasing laws affect a firm or an indus- 6. Do restrictions on FDI affect the sector? Are there govern- try? How would these affect investors? ment incentives such as tax breaks and concessional land 14. Is the industry largely based in an export processing zone? for promoting FDI? What level of integration do these zones have with the rest 7. What are the key finance issues for the value chain? Dif- of the economy? ferentiate between long-term vs. working capital: 15. What product quality standards apply? · Capital market regulation/access to finance issues 16. What kind of in-house quality control takes place, if any? · Within the banking system What is the cost? · With collateral 17. Are there instances of down times in the production cycle? · With creditors' rights How often? Why? At what cost? 8. Is trade financing available from foreign sources? What is 18. How does the capacity utilization of domestic firms in the the interest rate? industry compare with global practice? 9. What percentage of working capital finance is obtained 19. How does the technology on average in the sector compare through formal financial institutions? From retained with global and regional best practice? earnings? From personal/family sources? From informal 20. What percent of net revenue is allocated toward investment lenders? in technology? Primary Factor Cost Drivers vidual costs are benchmarked against those of com- (Labor, Capital, Land) petitor countries or good practice cases is it possible to understand the priority of the particular cost ele- Primary inputs usually constitute a major cost in the ments in improving the competitiveness of a sector. product transformation process. These inputs in- Previous value chain studies have shown that even clude labor costs, capital charges, and land costs for a labor-intensive sector such as apparel, labor (leasing or acquisition costs). cost is not always the driving factor that affects the It is also helpful to examine key policy issues that sector's competitiveness. For instance, even if wages affect the cost, quality, and productivity of these in the Kenyan apparel industry were reduced to zero, three main factors of production. (See also Box 9.) this would have little effect on the industry's com- For example, labor costs need to be supplemented petitiveness due to other overriding factors such as with information about labor mobility, hiring/firing low labor productivity, import tariffs, and very high practices, labor laws, regulations and standards, logistics costs.10 Similarly, in the Indonesian textile in- union activity, and labor productivity measures. dustry it is not just the actual wage rate that matters. Ranking the cost drivers as a percentage of FOB price provides a quick snapshot of which cost ele- ments really matter. However, only when these indi- 10. Subramanian and Matthijs (2007). 2 8 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Table 1: Unit Labor Cost Comparisons tutions can enter into the equation, most business sectors can improve the overall effectiveness and ef- Normal Hours/ ficiency of the value chain. Country US$/hour Week In Nigeria, the high cost of debt financing--with China (Coastal) 0.76 44 nominal interest rates of 20 percent and greater per China (Inland) 0.48 48 annum for short-term borrowing and about 16 per- India 0.67 48 cent for long-term (4 years) borrowing--was a strong Indonesia 0.55 40 disincentive to invest in new equipment. In another Pakistan 0.37 48 example, machinery upgrades in the Indonesian tex- Thailand 1.29 48 tile industry are markedly behind those in China, India, and Pakistan, which severely affects productiv- Vietnam 0.28 48 ity (Table 2). The high cost of repairs and maintenance Bangladesh 0.30 48 often is the result of an obsolete plant and machin- Sri Lanka 0.48 48 ery, which significantly increases operating costs. In Hong-Kong 6.20 48 Indonesia, high repair and maintenance costs are Source: Werner International 2004/5. primarily due to constraints in obtaining credit from commercial sources for upgrading textile technology. Labor productivity in Indonesia's apparel industry is Additionally, high financing costs often lead to delays less than that in coastal China by 30­50 percent. in obtaining intermediate materials. Poor labor productivity is exacerbated by overly rigid Land-related issues in developing countries in- labor market policies, strong labor unions, large sev- clude ambiguous property rights, a lack of clear titling, erance payments, and comparatively short working uncertainties about user rights of leased land, uneven hours (Table 1). treatment of foreign versus domestic firms, and zon- A common problem identified in value chains is ing restrictions. In Mozambique, for instance, a value difficulty in accessing financing for both working chain analysis of the tourism sector revealed that the capital and investments. This problem is especially government owns most of the land, which it leases acute among SMEs and in the agricultural sector. on a long-term basis for development. However, firms Without access to finance, many producers get stuck were reluctant to invest in production ventures be- in a low investment­low return production cycle. cause of uncertainties and lack of clarity about user Lack of finance may prevent a producer from plant- rights and the labyrinth of administrative procedures ing a crop, from investing in measures to increase pro- associated with obtaining leasing rights.12 In addi- ductivity, or from exploiting potential markets, Like- tion, increasing competition for land-use rights for ex- wise, financial constraints may prevent processors pansion of tourism to attractive coastal areas (e.g., for from expanding, which caps the amount of produce snorkeling and scuba diving) was fueling conflict be- they buy from local producers. tween investors and rural communities (who use the In general, the majority of agricultural finance in land for farming, fishing, and other uses). developing countries comes directly from within the The value chain analysis recommended that the value chain; namely, from buyers, sellers, or other government provide investors in hotels and other es- business associates, without the involvement of finan- tablishments with a one-stop source of accurate in- cial institutions.11 (See also Box 10). These efforts to formation and processing of user rights for land, access finance have been met with varying degrees with a clear delineation of the roles and responsibil- of success in matching demand with supply. By iden- ities between the local and central levels of govern- tifying relationships along the value chain, mitigating ment. Additionally, the analysis recommended that the constraints, and exploring how formal financial insti- 11. USAID, RAFI Notes: Value Chain Finance (Issue 2), June 12. FIAS (2006a), "The Tourism Sector in Mozambique: A 2005. Value Chain Analysis." C H A P T E R 3 . M E A S U R I N G P E R F O R M A N C E A N D E S TA B L I S H I N G B E N C H M A R K S 2 9 Table 2: Shuttles Installed in Selected Countries 2004 Installed Total Shipments 1995­2004 Shuttleless Shuttle Shuttleless Shuttle Country Looms Looms Looms Looms World 860 1450 513 120 Indonesia 29 197 11 5 China 260 686 258 98 India 11 105 9 5 Pakistan 25 10 6 -- Turkey 21 30 21 -- Source: International Textile Manufacturer Association. Box 10: Factoring A major challenge for many small firms is accessing finance done "without recourse" in that the factor that purchases for working capital. In particular, many exporters find it dif- the receivables assumes the credit risk for the buyer's ficult to finance their production cycles, because after ability to pay. their goods are delivered, most buyers demand 30 to 90 Factoring can be a powerful tool in providing financ- days to pay. Sellers issue an invoice--recorded for the ing to high-risk suppliers with a lack of market information. buyer as an account payable and for the seller as an ac- Factoring's key virtue is that underwriting is based on the count receivable--which is an illiquid asset for the seller risk of the receivables (i.e., the buyer) rather than the risk until payment is received. of the supplier. Therefore, factoring is particularly well "Factoring" is a type of supplier financing in which suited for financing receivables from large foreign firms firms sell their creditworthy accounts receivable at a dis- whose receivables are the obligations of buyers who are count (generally equal to interest plus service fees) and more creditworthy than the sellers themselves. receive immediate cash. The advantage of factoring is that it is not a loan and there are no additional liabilities on the firm's balance sheet, but it does provide immediate Source: Leora Klapper. "Export Financing for SMEs: The Role of Factoring." working capital financing. In addition, factoring is often World Bank Group, Trade Note 29. government take a proactive, community-driven ap- regulatory barriers, and charges for frequent repair proach to preparing land for tourism activities. In that and maintenance can add significant costs to produc- way, all land related issues could be addressed before- tion. (See also Box 11.) For example, producers in hand with individual communities prior to the in- Honduras and Nicaragua face frequent electrical vestors' bids for developing such tourism assets. power brownouts or blackouts, which seriously affect their production efficiency and costs due to frequent interruptions in production cycles (Table 3). Utilities, Administrative Overheads, Administrative overheads often constitute a signif- and Other Costs icant proportion of production costs for firms in emerging economies. To calculate administrative Expensive and poor quality utilities, transaction costs overheads, it is useful to know, for example, what per- due to bureaucracy and red tape, administrative and centage of time senior management engages in ad- 3 0 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Box 11: Questions to Consider When Assessing Administrative Costs · What typical regulatory compliance procedures are required for an order-to-delivery cycle for a typical trade transaction? Which agencies are involved? What are the for- mal and informal charges/ fees? · Are there industry specific regulatory compliance procedures required? What are these? Table 3: Electricity Indicators for Selected Countries Cost of power Days of Power % of Sales lost due Country US$/kwh Outage to power outages Chile 0.057 3.73 1.56 Cambodia 0.2 4.88 2.24 Guatemala 0.116 9.45 2.52 Honduras 0.035 22.5 3.62 Nicaragua 0.128 23.01 5.15 Source: World Bank Group, Enterprise Surveys, database. dressing bureaucracy. The Nigeria value chain study Table 4: Senior Management Time Dealing indicated that for every dollar spent on labor, two dol- with Bureaucracy lars were spent on senior managers' time to address % of Senior Management Time on bureaucratic hurdles, a multiplicity of government Country Administrative Barriers regulations, and administrative procedures. Regula- tory compliance is especially burdensome when ex- Nigeria 45% cessive red tape exists in registering a business, pay- India 14% ing taxes (corporate, property, and others), obtaining China 25% import and export licenses, registering land, obtain- Brazil 8% ing utility services, obtaining plant safety certification, Kenya 13% and adhering to environmental protection and cross- Bangladesh 4% border inspection processes. Table 4 shows that sen- Source: World Bank Group, Enterprise Surveys, database. ior managers in Nigerian firms spend almost half their time on administrative barriers. ing from land registration to corporate taxes, vehicle It is useful to record the typical regulatory com- permits, utility charges, plant health and safety cer- pliance procedures required for an order-to-delivery tification, and environmental protection. In addition cycle or a typical trade transaction. As a case in point, to the 29 regulations, shrimp industries must com- the Nigeria value chain study revealed that a typical ply with an additional 17 regulations for the shrimp shrimp firm faced 46 regulatory compliance proce- sector (see Tables 5 and 6).13 dures. All Nigerian firms must comply with a mini- mum of 29 regulatory compliance procedures rang- 13. Yee and Paludetto (2005). C H A P T E R 3 . M E A S U R I N G P E R F O R M A N C E A N D E S TA B L I S H I N G B E N C H M A R K S 3 1 Table 5: Nigeria: Regulatory Procedures (Economy Wide) Unofficial Official Fees Payoffs Description Government Agency Frequency (Naira) (Naira) 1 Land Rent State Government annual 6.5 million 2 Value Added Tax Ministry of Finance annual 5% of purchase value 3 Corporate Tax Ministry of Finance annual 30% of net profit 4 Education Tax Ministry of Finance annual 2% of profit 5 Capital Gains Tax Ministry of Finance annual 10% 6 Nigerian Social Insurance Federal Government monthly 6.5% of basic salary Trust Fund 7 Nigerian Housing Fund Federal Government monthly 2.5% of basic salary 8 Vehicle Registration Ministry of Transport annual 10,000 9 License for Logo Advertisement Local Government annual 2,500/vehicle on Vehicle 10 Vehicle Pollution Inspection Ministry of Transport annual 1,500/vehicle 11 Hackney Permit for Private Ministry of Transport annual 5,000 2,000 Business Vehicle 12 Canteen License Local Government annual 10,000 10,000 13 Property Tax State Government annual 14 Electricity Charges NEPA monthly 8.5 / unit plus demand charges 15 Water Charges Water Corporation monthly 25,000 16 Factory/Plant Health Certificate Local Government annual 70,000 17 Factory/Plant Environmental Fee Lagos State Environmental Agency monthly 50,000 18 Land Rent Local Government annual 19 Combined Expatriate Resident Federal Government annual 47,600 15,000 Permit and Alien Certificate (CERPAC)--Entry into Nigeria 20 CERPAC--Re-entry permit into Federal Government annual 5,000 1,500 Nigeria 21 Expatriate Quota Fee Federal Government annual 50,000 10,000 22 Property Tax Federal Government annual 23 NEPZA Registration/Licence Nigerian Export Processing Zone annual 25,000/export Authority 24 Capital Allowance Ministry of Finance annual 25 Surcharge on Import Duty Ministry of Finance every import 7% of basic duty 26 Corporate Tax Returns Ministry of Finance annual 27 Fire and Safety License Federal Government annual 10,000 10,000 28 Paye (employee deductions Federal Government annual based on for tax at source, etc.) individual salary 29 Corporate With-Holding Tax Federal/State Government every contract 5% of service/contract (WHT) 3 2 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Table 6: Nigeria: Regulatory Procedures (Specific to the Shrimp Sector) Unofficial Official Fees Payoffs Description Government Agency Frequency (Naira) (Naira) 1 Factory/Plant Health Certificate Nigerian Port Authority annual 3,500 2 Jetty License Nigerian Port Authority annual 0.35 million 3 Wharfage Levy Nigerian Port Authority every trip 5,000 4 Pilotage Levy Nigerian Port Authority annual 20,590/license 4,500/license 5 Lighter Terminal Levy Nigerian Port Authority annual 6 Documentation Fee Nigerian Port Authority every voyage 500 7 Vessel Survey Certificate Ministry of Transport annual 50,000/certificate 5,000/certificate 8 Berthing Permit Department of Navy ever sailing 4,000 9 Vessel Sailing Permit Department of Navy every sailing 2,000 10 Vessel Departure Permit Nigerian Drug Law Enforcement Agency every sailing 200/vessel 11 Vessel Arrival Permit Nigerian Drug Law Enforcement Agency every sailing 200/vessel 12 Pilotage Fee Nigerian Port Authority annual 20,590 /license 4,500/license 13 Cabotage License Nigerian Maritime Authority annual 2% of turnover 14 Bunkering Approval Fee Department of Navy every fueling 0.35 per liter 15 Radio License Ministry of Transport annual 4,800 2,500 16 Petroleum Licence Federal Government annual (barge) 10,000 2,500 17 Vehicle Entry License Fee Nigerian Port Authority annual 5,000 (Levied by Port) Trade Logistics and Transport importers experienced at the ports. According to the Doing Business data, the cost for average export doc- The cost and quality of trade logistics and transport umentation in Bangladesh was US$158, compared services is a key determinant in a firm's ability to with US$30 in Indonesia and US$13 in Malaysia; bring its products and services to the market in time. whereas trucking costs for an average 20-foot con- Important indicators to assess the performance of the tainer amounted to US$245 in Bangladesh, compared trade logistics and transport services include: trans- with US$180 in Indonesia and US$130 in Malaysia. action times and costs to clear imports and exports, The time it takes to complete various import pro- the number of documents that must be completed cedures are compared for three countries in Figure and approved, the number of signatures needed in 14. Kenya and Honduras are plainly at a disadvantage a typical trade transaction, waiting times at ports and compared to Spain, where it takes only 10 days to terminals, customs clearance time, the cost of mov- complete an import transaction. Despite some sig- ing containers, and inland transport costs14 (Box 12). nificant reforms that were recently undertaken in In the Bangladesh ceramics industry, a heavy re- Kenya,15 several segments of the supply chain there liance on imported inputs was exacerbated not only have barriers. The key bottlenecks in Kenya are in the by the poor state of the Bangladeshi road network but also delays at ports, which increased the delivery times by several days; rent-seeking by customs and 15. Kenya allowed traders to submit customs declarations port officials aggravating the problem exporters and before the goods arrive at the border, which reduced the amount of time needed for goods to clear customs by three days. Kenya also introduced new cranes at the port that would enable more 14. Hausman, Lee, and Subramanian (2005). efficient terminal handling activities (Doing Business, 2007). C H A P T E R 3 . M E A S U R I N G P E R F O R M A N C E A N D E S TA B L I S H I N G B E N C H M A R K S 3 3 Figure 14 Time to Complete Import Procedures (Honduras, Kenya, and Spain) 70 Step 1: Conclude purchase contract and transmit letter of credit Step 2: Assemble and process documents for import 60 Step 3: Vessel waiting time to enter berth Step 4: Berthing and unloading Step 5: Terminal handling activity 50 Kenya: 45 days Step 6: Customs inspection Step 7: Technical control 40 Step 8: Inland transportation 30 Honduras: 39 days 20 Spain: 10 days 10 0 1 2 3 4 5 6 7 8 Steps Source: Doing Business (2007). time it takes to conclude a purchase and transmit let- cient terminal handling may keep ships in a berth ters of credit, assemble and process documents, and longer than is necessary for loading or unloading. Bor- transport goods inland. By sharing inspections, Hon- der clearance procedures in many countries are no- duras was able to cut the waiting time at its border toriously slow. Inspections by customs and control with Nicaragua in half. Despite this measure, the agencies (e.g., ministries of agriculture and health) time required to complete an import transaction in are often sequential rather than simultaneous, which Honduras is still very high. further adds to delays. These delays can be exacer- In many countries, poor infrastructure and truck- bated by inspections of a high percentage of contain- ing services imply significant costs and delays. The ers that pose little risk. A biased interpretation of du- logistics cost for handling a 20-foot export container ties could lead to disputes and delays, which are in Kenya is almost US$2,000. The carrier industry in sometimes resolved only through bribes. many countries is fragmented, operators are not ori- Poor logistics services force firms to carry a larger ented to offer customer service, equipment is old, and administrative staff, hold more inventory for longer there is no protection through carrier liability insur- periods, and incur high cargo insurance costs. Firms ance if cargo is lost or damaged. are also exposed to risks of missing delivery dates with The time for goods to clear a terminal is also high consequential fines, shipment value discounts, or in many countries. In a congested port, a vessel may rejection of the shipment by the customer. These in- have to anchor offshore awaiting a berth, or ineffi- efficiencies drive up the costs of doing business. 3 4 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Box 12: Questions to Consider When Assessing Trade Logistics 1. What trade policy issues affect sourcing of raw or inter- 5. Who is responsible for pre-shipment inspection of the out- mediate material (e.g., preferential trade agreements, bound product? What is the cost? rules of origin requirements, import tariffs or import bans)? 6. What is the prevalence of illegal/corrupt practices? What What is the level of import tariffs for key inputs and final are the impacts on the sector? products? 7. Does the state of physical infrastructure impede the produc- 2. How do trade logistics affect the sector? (Considering that tivity of the sector? How does this affect competitiveness? just-in-time delivery is critical for competing in world mar- What are the trucking charges ($/km ton)? kets, this category includes administrative procedures, 8. How often in the last year were shipments delayed? What customs and technical control processes and other non- is the value of loss as a percent of shipment value? tariff barriers to trade, such as standards for product qual- 9. How integrated is the order-warehouse-transportation dock ity and testing, certification processes, etc.) system in terms of lead time, costs, and number of process 3. What is the extent of the informal market for logistical activities? How close is lead time to process time? services? 10. What is the percentage of defects? How are causes for de- 4. Which non-tariff barriers affect the industry? fects analyzed and traced back through the chain? · How long does it take to clear exports? 11. Who bears the cost of defects and the costs of disposing · What are the procedures for clearing shipment? them? How much are these costs? · How much paperwork is needed? 12. What is the average percentage of returned consignments? · How many agencies are involved? What is the value of returned goods? 4 Developing Policy Recommendations Policies, institutional efficiencies, infrastructure ser- gin will depend on all the costs--raw and interme- vices, factor costs and quality all affect the total cost diate goods as well as the costs of the primary inputs structure. These sometimes drive costs up and some- and transport/logistics services. A quick snapshot of times they drive costs down through subsidies and the industry's cost competitiveness is the relative concessions. For example, two government policies size of the wedge between the FOB price and all affected the performance of Nigerian wax print other costs. A highly competitive industry would textiles. First, an export expansionary grant (EEG), show a relatively large wedge. which the government initiated for a limited period In addition to costs, a VCA must consider produc- of time for promoting non-oil exports, resulted in tivity and the input-conversion ratio, which plays a rapid growth in cotton exports. This in turn led to a critical role in determining whether a firm (or indus- scarcity of domestic cotton and increases in raw ma- try) is profitable. Because final prices are determined terial costs for the textile industry because the indus- by the market, a firm needs to focus on increasing try had to import cotton. Abuse of the subsidy even- its productivity. The higher the productivity of a sec- tually forced the government to withdraw the EEG. tor, the lower the costs of production as a propor- This resulted in tremendous uncertainty and costs for tion of the FOB price, the greater the value added, many firms that had invested in expanding their op- and potential profits. The latter may lead to rein- erations to take advantage of the EEG. Second, the vestments in the sector, which could have spillover government imposed an import ban on foreign tex- effects to the rest of the economy. tiles, which did nothing to stop illegal imports of Value chain analysis helps to effectively isolate the Chinese wax print textiles into the region and into binding constraints that affect the sector in a system- Nigeria on a large scale. These illegal imports forced atic manner. Establishing benchmarks helps to prior- domestic producer prices down, resulting in the clo- itize the constraints so that targeted solutions can be sure of several Nigerian factories. formulated. The set of issues that emerge from such Assuming that a producer in a developing econ- a detailed analysis at a sector level has implications omy is a "price taker," the value added and profit mar- for both the public and private sectors alike. 3 5 3 6 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Figure 15 Sample Policy Recommendations Framework Public Sector Private Sector · Reduce VAT Redemption delays · Private power provision to rationalize cost and/or enhance performance · Risk-based system for profiling tax payers, backed Wide by an effective post-refund audit system · Private water and sanitation · Review and/or revise Investment Code to ensure · Privatize air/sea ports level playing field between SME and large firms Economy · Improve land registries; clarify titling/leasing or user rights · Remove tariff distortions on main imported inputs · Shop floor management enhancements to increase for the sector productivity · Reduce barriers to Import Licenses for key actors in · Diversification of products and/or markets; Specific the sector · Improve capacity of suppliers, infrastructure for · Improve enforcement of product standards sourcing to improve backward linkages · Policy for attracting FDI (e.g., hotels) · Promotion for attracting FDI in for e.g. hotels, tourism Industry products Source: Uma Subramanian (2007). Some of the issues are sector-specific, and others Example: Tourism in Mozambique are relevant across an economy and apply to many sectors and firms in a country. Both the public and Mozambique has a strong comparative advantage in private sectors must work closely together on some tourism but has so far not been able to exploit its po- issues if they are to be addressed effectively. A use- tential. In 2000, the Government of Mozambique ful framework for developing targeted solutions is pre- adopted the "Action Plan for Reduction of Absolute sented in Figure 15. Along the vertical axis, recom- Poverty" (PARPA) as a medium-term rolling instru- mendations are divided by whether they address ment incorporated into the public planning process. economy-wide or sector-specific constraints. Along Tourism was seen as a priority area in which additional the horizontal axis, solutions that are primarily ad- investment could create the jobs necessary to meet dressed by public sector agencies are separated from the PARPA objectives. Most developing countries those that are in the realm of private firms, even have increased their market shares in international though many solutions require joint public-private ef- tourism; Sub-Saharan Africa in particular has experi- forts to jumpstart reforms. enced strong growth in tourism within the last two The World Bank Group has conducted a number decades, increasing its market share of global ar- of value chain studies, and in one way or another, they rivals from 1.5 percent in 1970 to 4.5 percent by have led to substantial policy changes. The following 2003.1 Despite its strong tourism asset base and geo- examples illustrate how the diagnostics of a VCA can graphic proximity to South Africa--one of the world's lead to tangible recommendations for policy changes. These include the tourism sector in Mozambique 1. FIAS and OECD. "The Tourism Sector in Mozambique: A and the textile sector in Indonesia. Value Chain Analysis." World Bank Group, March 2006. C H A P T E R 4 . D E V E L O P I N G P O L I C Y R E C O M M E N D AT I O N S 3 7 Table 7: Summary Recommendations for the Tourism Sector in Mozambique Public Policy Private Sector Economy-Wide 1. Land issues 2. Airport infrastructure · Clarify land user rights · Improve infrastructure at airports and on key · Establish a "one-stop" source of accurate links to regional destinations information and processing of land user rights; · Clearly delineate the roles of local and central governments. Industry-Specific 3. Ease and cost of access 4. Marketing of Mozambique as · Remove visa requirements for key source prime tourism destination markets; streamline frointier formalities o · Develop strategy for effective, coordinated reduce waiting times promotion of the country's image by domestic · Revise bilateral air service agreements with tour operators, hotels and airline EU countries and key African hubs. representatives · Accelerate implementation of UNIVISA · Revise policy on charter flights to improve frequency and flexibility top tourist destinations--Mozambique trails behind bique study have been selected (see Table 7). By no all its neighbors except for Malawi. means do these four include all the sector's short- Although the country's tourism sector has grown comings, but they illustrate how public and private from a very low baseline, at an impressive annual sectors can address economy-wide and industry- growth rate of 13 percent (1999­2003), the average specific issues. It should be noted that prioritiza- number of tourists per 100 inhabitants, at 2 for Mozam- tion of the issues went hand in hand with an assess- bique, is half of Africa's average, and well below the ment of the feasibility and potential impact of the world average of 11 per 100 inhabitants. Mozam- proposed solutions. The first two examples apply bique's poor performance reflects problems with its economy-wide, while examples three and four are overall image, product variety, and the quality of tourism sector specific. tourism experiences. Realizing this potential depends The first finding, which affects the economy as a substantially on the ability of all players in the Mozam- whole and needs to be addressed by the govern- bique tourism value chain--from hotel operators, ment, relates to the numerous difficulties with land- tour operators, hospitality service providers, relevant related issues. Because of the lack of clarity and un- government agencies--to create and deliver high- certainty with land use rights, the sector cannot quality tourism experiences that can transform the expand fast enough and the risks associated with country into a "must see" destination in Africa. FIAS user rights turn off private investors. The recom- conducted a tourism VCA in Mozambique in 2006 mendations emphasized the need for the government and formulated targeted policy recommendation to establish clarity in land user rights; establish a based on its findings. one-stop source for land registration and leases; The VCA found that the requirements for turning more clearly delineate the roles between local and Mozambique into a regional tourism destination central governments; and establish early consultative were extremely high. For the purposes of illustrating mechanisms with the community. how policy recommendations are formulated from The second major finding identified the difficulty VCA results, four of the major findings of the Mozam- and high costs of accessing the country from abroad. 3 8 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H There were very limited intercontinental flights from (See Annex 7: Sample Policy Recommendations & Ac- Europe to Maputo; most countries had flights to tion Plan Matrix: Mozambique Tourism High Priority Johannesburg, where connecting flights had to be Initiatives.) taken to Mozambique. While this issue has implica- tions for the economy as a whole, the tourism sec- tor in particular was significantly affected. The rec- Example: Textiles in Indonesia ommendations called for a review of existing bilateral air service agreements with EU countries by the gov- The textile VCA showed that although Indonesia had ernment in coordination with the World Bank's Com- gained a renewed strength in the U.S. market, its com- munications project.2 In addition, a review of the petitive position was under threat, particularly as a policy on charters was recommended to enable more result of cut-throat competition from China and frequent and flexible charter operations. Visa re- India. The project pointed to five key constraints quirements for tourists from most major source that needed urgent attention if the sector wanted to countries (excluding South Africa) acted as a deter- maintain its global market position: rent. A key recommendation was to lower these re- strictions, making the country a more attractive des- · Low levels of investment in the sector during re- tination for tourists. cent years resulted in a declining technological pro- For a reform agenda that had to be driven mainly file and lower productivity. by the private sector, in partnership with the public · Weaknesses in trade facilitation measures exposed sector, the VCA pointed to two areas: (i) improve- the industry to rent-seeking activities that could ments in infrastructure at airports other than Maputo; significantly undermine future growth prospects. and on key links to destinations in the northern part · Rising energy costs were expected to raise over- of the country, and (ii) more effective representation all production costs by 5­6 percent. A serious con- of Mozambique as a prime tourist destination in re- cern was the uncertainty associated with the in- gional and global tourism markets. There was clear creases in energy costs. need for better collaboration between foreign and do- · Domestic tariffs and taxes had a negative effect mestic tour operators; and effective coordination on operational costs (e.g., VAT and duties on im- among the industry's stakeholders. Airlines, hotels, ported raw materials). There was a high risk of ex- tour operators, retailers, restaurants and a whole port losses from trade diversion due to higher av- range of public sector agencies needed to effectively erage tariffs on textile and apparel products relative work inter-sectorally to develop, promote, and man- to key competitors in the U.S. and other markets. age tourism destinations and, more broadly, Mozam- · Low labor productivity and rigid labor market poli- bique's image and positioning in world markets. cies were undermining Indonesia's relative labor cost advantage in the long run. The following recommendations were derived 2. World Bank (2001), Mozambique Communication Sector Re- form Project. from the VCA: (Table 8). C H A P T E R 4 . D E V E L O P I N G P O L I C Y R E C O M M E N D AT I O N S 3 9 Table 8: Recommendations for the Indonesian Textile Sector Recommendation Public Private Improve technology Establish guidelines for accelerated depreciation for tax Explore options for "supplier credits" from Japanese and and productivity purposes. European equipment makers in discussion with MIGA. Reduce the impact Improve the transparency of energy pricing policy; Ease access to equipment and technology for alternative of energy costs publish standardized rates. energy. Establish a National Textile Energy Efficiency Scheme (TEES). Improve labor Principles guiding severance pay system aligned with: Establish a Productivity Improvement Centre possibly productivity · Good practices associated with textile training center in Bandung, Indonesia. · Sustainable deferred compensation schemes (e.g., joint savings scheme between employer and employee; reduce the frequency of changes to the minimum wage and limit government involvement in overtime rates). Reform the social security scheme. Reduce the impact of · Eliminate advance income taxes on imported Coherent marketing strategy: tariff and non-tariff processed materials. · Public­private program barriers and domestic · Establish a better risk-based taxpayer profiling system · Target selected markets/buyers taxes and cost-effective post-refund audit system. · Funding mechanisms of joint marketing campaigns · Implement IMF recommendations for VAT · National branding and image simplification. · Reduce VAT refund processing to 10 days (IMF 2006). · Pay interest on delayed refunds after 30 days of claim. · Reduce administrative procedures for VAT refund claims. · Eliminate the requirement to submit original copies of invoices. · Streamline methods for auditing refund claims. · Reduce information required in VAT return from 175 fields to 17 fields. · Strengthen the capacity of the tax office, including the use of third parties. · Strengthen the central government review team to improve the scrutiny of nuisance tax, regulations, and levies imposed by local governments. · Benchmark administrative barriers and cost of compliance to regulations at the provincial or local government level. 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Online available value_added/keypoints.asp?p=keypoints at: http://www.doingbusiness.org/ Von Campenhausen, Claus and Georg Petrisch (2004), Yee, Peter (2004), "Foreign Trade and Logistics in "The benchmarking matrix", Managerial Audit- Tunisia," Ministry of Tourism, Commerce and ing Journal 19 (2), pp. 172­179 Handicraft, Government of Tunisia and World Werner International (2005), "Primary Textiles Labor Bank Group, February Cost Comparisons, Winter 2004/5. Yee, Peter and Michela Paludetto (2005), "Nigeria: World Bank Group, Enterprise Surveys database Value and Supply Chain Study," World Bank (Washington, D.C.) Group, March. World Bank Group (2003), Private Sector Develop- ment Strategy: Implementation Progress Report (June) Annexes 1. Acronyms Used in this Report 2. Value Chain Analysis: Policy Questions 3. Value Chain Analysis: Sample Terms of Reference 4. Sample Sourcing Business Survey (Peru Textiles) 5. INCOTERMS 6. Industry Competitiveness Indicators for Value Chain Analysis 7. Sample Policy Recommendations & Action Plan Matrix: Mozambique Tourism High Priority Initiatives) 4 5 4 6 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Annex 1 Acronyms Used in this Report AGOA African Growth and Opportunity Act BEE business-enabling environment CAFTA Central America Free Trade Agreement CAFTA-DR Central America Free Trade Agreement ­ including Dominican Republic EEG export expansionary grant EU European Union FAO Food and Agriculture Organization FIAS Foreign Investment Advisory Service (World Bank Group) FOB free on board GDP gross domestic product GTZ Gesellschaft für Technische Zusammenarbeit HACCP Hazard Analysis and Critical Control Points ICA Investment Climate Assessment IFC International Finance Corporation (World Bank Group) MIGA Multilateral Investment Guarantee Agency (World Bank Group) PARPA Government of Mozambique Action Plan for Reduction of Absolute Poverty ROA return on assets ROE return on equity SCOR Supply-Chain Operations Reference SME small- or medium-sized enterprise TEU 20-foot equivalent unit UNIDO United Nations Industrial Development Organization USAID U.S. Agency for International Development VAT value-added tax WBG World Bank Group WTO World Trade Organization A N N E X E S 4 7 Annex 2 Value Chain Analysis: Policy Questions The questions listed below aim to provide practical 9. What types of Corporate Social Responsibility- policy guidance for practitioners who conduct value related issues (e.g., environmental standards; chain studies. The questions are applicable to most child labor laws) affect the sector? manufacturing sectors. Additional questions specific 10. What is the market share trend in key markets? to an agricultural processing sector appear after the general policy questions. II. Competition Policy I. Trade Policy 11. Does a level playing field exist among producers and firms (e.g., small vs. large; foreign vs. domes- 1. What are the global/regional trends regarding tic; formal vs. informal) on issues such as: tariff and non-tariff trade barriers? What is the gen- a. Enforcement of taxes, import tariffs, product eral level of protection in the industry? standards, etc. 2. What types of regional and international trade b. Access to formal sources of financing(banks) policies or agreements (e.g., CAFTA, WTO) affect c. Access to key public utilities (e.g., energy) trade in the sector and in the country? Differen- 12. Why kinds of licensing restrictions exist to limit tiate between regional and international agree- the number of firms that produce or distribute ments. raw, intermediate, and final products? 3. What kinds of duties or import tariffs exist for key 13. What kinds of incentives or restrictions exist inputs such as machinery and equipment? for production units by size (e.g., do small and 4. Does a VAT exist on imported material? What is medium-sized enterprises receive subsidies)? the average duration for reinstatement of the 14. Who are the new entrants? Who has left the mar- VAT? ket? Why? 5. Is the industry largely based in export process- 15. What types of licensing restrictions exist for new ing zones (or special/privileged industrial zones)? entrants? 6. Describe the degree to which these zones are in- 16. What types of criteria exist to allocate transpar- tegrated with the rest of the economy. ent licenses and permits? 7. Which types of non-tariff barriers affect the industry? a. Customs and technical clearance: How long III. Other Policy and Regulatory Issues does it take to clear imports and exports? b. What are the procedures for clearing ship- 17. Are there any critical land market issues such as ments? restrictive zoning laws, administrative barriers, or c. What amount of paperwork is needed to a lack of clarity in titling that must be considered? clear shipments? How do they affect the industry? d. How many agencies are involved in clearing 18. What is the prevalence of illegal/corrupt practices shipments? and what are their effects on the performance of 8. What product quality standards apply? the sector? 4 8 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H 19. What kind of anticorruption laws exist, and how tor in the country? How does this productivity effective have they been? compare with the average firm in the country? 20. What is the rate of growth of FDI in the sector? 31. How does the capacity utilization of domestics Do restrictions on FDI affect the sector? What is firms in the industry compare with global and re- their basis? Are there government incentives for gional best practice? promoting FDI such as tax breaks and inexpen- 32. How does the technology in the sector com- sive land? pare with global and regional best practice? 21. What is the share of informal firms in this sector 33. How do the factor costs of labor, capital, and key in the market? inputs compare with global and regional best 22. Are intellectual property rights adequately estab- practice? lished and enforced for the industry? 34. With just-in-time delivery being a critical compo- 23. Does the government extend any incentives for nent for competing in world markets, how well technological upgrading? do logistics services (i.e., customs procedures and facilities; technical barriers to trade such as stan- dards for product quality and testing, certifica- IV. Competitive Advantages tion processes, etc.) perform? 35. What is the typical order-to-delivery cycle time 24. What competitive advantages do major produc- of the industry? How does it differ from that of ing nations have? How critical are the following competitors? factors to the industry and the country? 36. What are the key finance issues for the value a. Location/geography chain (such as the following)? b. Infrastructure (roads, ports, airports, telecom- a. Capital market regulation/access to finance munications, power, water) issues c. Labor skills b. The banking system d. Low factor costs c. Collaterals e. Technology d. Creditors' rights 25. What is the structure of the market? e. Informal sources of financing 26. Does the sector serve a niche market? f. Trade financing available from foreign sources 27. Does the state of physical infrastructure and util- g. Interest rate ities impede the productivity of the sector? How 37. What are the inventory holding costs? What part does this affect competitiveness? of the inventory holding costs are due to firm in- efficiency versus policy and market factors out- side a firm's control? V. Performance Measures 38. What percent of inputs (i.e., raw materials) to the industry is imported? How do the price and qual- 28. What international benchmarks does the indus- ity of imports compare with domestic raw or in- try use? termediate material? 29. How does the productivity of labor, capital, and a. What kinds of protective measures exist on key inputs of national firms in the sector com- imports such as tariffs/duties/bans? pare with global and regional best practice? b. What kinds of enforcement of product qual- 30. How does the productivity of labor, capital, and ity standards exist in the country? key inputs of the average firm differ from the firms c. What kinds of policy restrictions exist on do- considered to have the best practices in the sec- mestic production of this material? A N N E X E S 4 9 39. What kinds of unique labor market regulation af- in key external markets (e.g., breaded shrimp in- fect sector productivity? stead of frozen; roasted coffee instead of green)? If not, why not? a. What types of tariffs are imposed by the VI. Additional Questions for an Agricultural United States, European Union, or other Processing Sector trade partners on higher value products? b. Are higher standards required? 1. Are the food quality standards on par with inter- c. Is it difficult to establish market credibility for national standards? Is there a problem with en- the higher value products? forcement of standards? d. Is there an absence of adequate processing 2. Is there a difference or difficulty in enforcing facilities for higher value-added processing? standards on small producers? 10. What issues, such as those below, are associated 3. How qualified and capable are quality certifica- with sourcing raw or semiprocessed agricultural tion laboratories and processes? products? 4. How many exporting firms in the sector are cer- a. Poor road links tified exporting firms (e.g., HACCP, EureGAP, b. Inadequate or unreliable transport services etc.)? c. Inadequate or absent cooling chains, ware- 5. What is the frequency with which the sector houses, etc. products fail inspection tests in importing coun- d. Poor-quality supplies tries? What is the frequency of rejections? e. Reliability of supplies 6. What types of inspections do agricultural prod- f. Inadequate supplies ucts undergo in key import countries? 11. What is the marketing channel for the agricultur- 7. Were any alerts released in the last quarter or ally processed product? year by the regulatory authorities of importing a. Sell to government board/body countries? b. Auction 8. What types of subsector policy issues (e.g., high c. Private brokers prices for fertilizers or pesticides) exist in the agri- d. Retail chains cultural sector? Why do they exist? e. Other a. What types of tariffs exist on imported in- 12. Is this sector part of the government's export de- puts? velopment strategy? What is the strategy? b. Do transport logistics costs add to import 13. How effective are the agricultural industry asso- costs? ciations in lobbying for change in the sector? c. Is there a lack of competition among quality 14. What is the structure of intermediaries between producers in the domestic market? Why? local small agricultural producers and proces- 9. Would producers in Country X be able to sell sors (e.g., cooperatives, traders, brokers, consol- processed products with a higher added value idators, etc.)? 5 0 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Annex 3 Product Value Chain Analysis: Sample Terms of Reference1 This is a generic terms of reference, designed as a developing a coherent economic growth develop- guide for outlining the basic scope of work and re- ment strategy. To this end, the study's objectives are search activities necessary for a team of consultants as follows: to assess the performance of firms or farmers in- volved in the production and export of tradable agri- · Develop public and private awareness and consen- cultural products (e.g., coffee, cotton, apparel, shrimp) sus on the range, importance, and impact of mar- using a value chain analytical framework. Consul- ket and policy constraints that limit the growth of tants would be expected to apply this framework as businesses in the country. a means for identifying, assessing, and prioritizing con- · Assess and document the performance of local in- straints; as well as remedial measures and cross- dustries involved the value chain of the product cutting policy reforms that would most likely en- (e.g., farmers and producers of final and interme- hance the growth and competitiveness of an economy. diate goods, such as processors, input suppliers, The terms of reference are designed for a single freight forwarders, transporters, and so on) rela- consultant or a team of consultants with expertise and tive to global competitors. knowledge of the following: · Identify the underlying policy, institutional, and in- frastructural issues that affect the competitive- · Value chain analytical and benchmarking tech- ness of private sector activity in the country, and niques relevant to the industry establish priorities for which public sector inter- · Trade, economic, and industrial policies relevant ventions might have the greatest positive impact. to both product and service sectors in the coun- · Identify actions the private sector can take to im- try under review prove domestic productivity, expand its market · Global industry trends, practices, and business share, reduce costs, increase competitiveness, and management strategies relevant in various seg- add local value along the supply chain for the ments of the tradable product(s) in the country product. · Examine the challenges and opportunities for in- Ideally, consultants should have expertise in value creasing access to and shares of global and re- chain analysis, the sector to be assessed, and have the gional import and export markets for the product ability to gather data, perform surveys, and other and associated inputs. research. Scope of Work Objectives of the Study The consulting team should provide adequate an- The purpose of the study is to elicit recommendations swers to broad questions such as the following: to improve the business environment in Country X in a manner that enhances competitiveness, growth, · Which segments of the product value chain are employment, and business opportunities. The study competitive, and which ones are not? should provide input that will serve as the basis for · Which externalities, disconnections, and efficien- cies in one segment of the product value chain 1. The estimated average costs for one industry value chain is roughly US$50,000 including consultants' costs. have significantly affected performance in other A N N E X E S 5 1 segments of the chain, thereby undermining the concerns, changing consumption patterns, growth of the entire industry? changing climatic conditions, and so on). · Which institutional and policy interventions have Benchmark these data points with competing strengthened the competitiveness of various seg- countries, and regional and global averages. ments of the chain, and which ones have under- · An analysis of global, regional, and national mined it? Which policy and infrastructure inade- product and industry trends, including key quacies currently impede efficient and effective export and import markets, market shares; input sourcing, production, and transformation of changes in sourcing, production, and supply value and delivery of the products that can be chain management practices; standards and traded to domestic or foreign consumers? technological practices; and so on. Identify key · What other types of underlying factors limit the drivers of the demand for the product, and spe- ability of local firms to directly contribute to the cific factors required for local producers to com- product chain? Are there specific factors that limit pete in each of these markets, including, prod- the benefits (or rents) within the value chain, and uct quality or required processing standards. to the local community? · An assessment of the relationship between · What public-private remedial measures should be product sector contributions and broader taken to improve domestic productivity, reduce macroeconomic indicators (e.g., national and costs, and strengthen the ability to add local value provincial GDP, inflation, employment, foreign throughout the chain? What remedial measures exchange, tax revenues, and so on). This should need to be implemented to strengthen the integra- include a review and synthesis of the policy tion of the domestic private sector with the regional and administrative framework governing each and global supply chains where applicable? product. Completing this task will require a re- view of other analytical and policy studies cov- As part of this analysis, the consultant (or team) ering investment climate, trade and transport, should complete the following tasks: and so on (e.g., investment climate assessment, Doing Business indicators, FIAS administrative Task 1: Analyze the market by compiling a barriers studies, and so on). comprehensive profile of the products, · A brief discussion of the existing market struc- associated industries, and markets ture (competition policy) and entry barriers, if any. It should also include competitive dynam- 1. Present a brief product and industry profile that ics of core service providers linked to the prod- should include (but not be limited to) the fol- uct value chain including profiles of economic lowing items: agents (e.g., input suppliers or producers, core producers and intermediaries, transporters and · Global, regional, and national market, produc- freight forwarders, and so on). tion, and trade data to assess the structure of global, regional, and local demand, produc- 2. This phase should also include a good stock- tion, output, trade volume and values, con- taking of all previous relevant studies or projects sumption patterns, input and output prices, (both completed and ongoing) and a gap analy- and so on. sis to clearly identify the added value of the cur- · A discussion of the global external shocks that rent project in specific terms. By the end of this are likely to influence the export performance phase, the team should already have identified of the products or sector (e.g., changing global broad key issues that affect the sector. The task policies such as phasing out the Multifiber team leader and team must work closely together Agreement (MFA), rising fuel and energy prices, at this phase before the first mission trip is the prevalence of global terrorism and security launched. 5 2 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Task 2: Value Chain Analysis some customs procedures and facilities, technical barriers to trade, etc.). The value chain analysis will include: · Identifying underlying sector-specific factors that are causing poor performance along the value · Value chain mapping (i.e., separating the product chain (e.g., standards for product quality and test- value/supply chain into its major value-added ac- ing, certification processes, sector policy distor- tivities or segments). For each identified product tions, administrative procedures, skills, access to or sector the consultant should characterize the capital equipment, access to capital, tax structure, product market to include sources of raw mate- and licensing). rials, buyers, mechanisms for information flow · Establishing monetary costs of policy interven- within the value chain, and key supporting ser- tions/regulations (i.e., the costs of compliance vices (energy, transportation, etc.). and hidden/informal costs of compliance such as · A measurement of the product value chain per- the cost of internal resources used by each com- formance, which includes the following steps: pany to comply). Provide estimates of cost, time, and added value · Identifying good practice cases to support the of sourcing, transforming, and delivering raw recommendations to address the issues. materials within one segment (or process) of the · Analyzing the institutional and policy linkages be- chain to another. tween the performance of the value chain and Benchmark the indicators in the point against specific policies, regulations, and institutions orig- those of competing countries involved in the pro- inating from either the public or private sectors. duction and delivery of similar products. Consultants may identify which specific institu- Identify key segments and activities within the tional and policy measures would help to enhance chain where performance lags behind those of the private sector's ability to improve the per- competing countries/industries. formance of the value chain. Implications of these Prioritize segments and activities in the chain policy measures should be discussed and sup- where poor performance or inefficiencies se- ported by evidence drawn from the value chain verely undermine the competitiveness of the analysis and from international good practices. A entire value chain. summary of these issues and their implications could be presented in a matrix that highlights Task 3: Identify key policies, regulatory, their effects on supply-chain competitiveness. and institutional constraints to the performance of the value chain and To the extent possible, the consultant (or team) identify appropriate solutions should also provide some sensitivity analysis of the effect these constraints have on key economic devel- Drawing on the value chain and benchmarking analy- opment objectives (e.g., how can the amount of sis in Task 2, the consultant team should identify local added value and income generation be in- key policy and market factors that will improve the creased; what are the prevailing attitudes toward in- competitiveness of a specific industry, as well as vestment and risk-taking, safety and security, and those that undermine it. These tasks might include working conditions?). the following: Finally, based on the findings of the study, the consultant should offer recommendations for World · Identifying cross-cutting/economy-wide bottle- Bank Group support for policy and institutional necks that affect the capacity of the private sector measures that would improve productivity and per- to compete (e.g., a lack of infrastructure, cumber- formance along the value chain. A N N E X E S 5 3 Key Milestones, Deliverables, · A workshop will be held in the country to discuss and a Time Frame the findings and fine-tune the recommendations. · The consultant team should finish its report by XX. · Desk research might include (i) taking stock of This should be in the form of a manuscript that can studies or projects and identifying a scope of work be published with a length of approximately X and (ii) market analysis. This should be completed pages, not including annexes, and statistical and before the first mission trip occurs. Consultant other tables. The report should draw conclusions should submit an inception report containing a re- about the current status of laws, regulations, ca- search on points (i) and (ii). pacities, and programs designed for developing the · The first mission trip should include field work to sector in the country; it should identify areas that collect data for the value chain analysis and a pre- need priority attention; and it should recommend liminary analysis of issues. key steps the government, private organizations, · First draft to be submitted by XX. and international development agencies should · The second mission trip will involve completing take. Reference should be made to the appropri- field work and filling data gaps. It should focus on ate contexts for such efforts--whether at the na- analyzing the underlying policy, institutional, and tional level, at the regional level, or in relation to other constraints affecting the competitiveness international organizations and forums. of the product value chain. · Second draft report to be submitted by XX. The consultant team will report on this study to XX · Following review and feedback by the task team managers. and the peer review committee, a draft of the final report should be delivered by XX. 5 4 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Annex 4 Sample Sourcing Business Survey (Peru Textiles)1 Objective: To gauge the importance of different factors in investment and sourcing decisions of textile and apparel companies Interview target: Sourcing managers from large international textile and apparel buyers A. INTERVIEWEE PROFILE Company name: Company type (retailer, licensee, distributor, other [please describe]): Contact name: Contact e-mail address: Contact phone number: Home country of company: Private or publicly owned company: Annual revenue: 1. Used in the Peru Textile Value Chain Study, FIAS, 2007. A N N E X E S 5 5 1. For each of the following countries, please answer the questions on the left. CBI Pakis- Bangla- Other (Caribbean China Mexico India tan desh SE Asia Basin) Peru Other Do you currently source from this country? Yes/No What percent of total global purchasing does this country represent? Has this changed in the last 3 years? By what percent has it increased or decreased? Do you plan to expand operations in this country in the near future (Yes, No, Year)? Do you source a major product (>15% of sourcing) from this country? (Yes, No, please name product.) B. INVESTMENT AND SOURCING DECISIONS 2. If your decision to contract a new supplier is based on country of origin, please mark with an X how important the following criteria are for your sourcing decisions. IMPORTANCE 1 2 3 4 5 Not Slightly Fairly Very CRITERIA Important Important Important Important Important Political and economic stability Labor cost Workforce skill Workforce productivity Geographic proximity to markets Trade agreements Corruption Social and environmental standards and practices Government regulation and administration (bureaucracy) 5 6 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H 3. Rate the performance of the average factory in each country for the factors below on a scale of 1 ("very poor") to 5 ("excellent"). If you are unfamiliar with the performance of any of these countries, write NF (not familiar). CBI Pakis- Bangla- Other (Caribbean Factor China Mexico India tan desh SE Asia Basin) Peru Other High workforce skills Low cost of production other than labor High workforce productivity Low labor cost High product quality Fast speed-to-market Sophisticated level of services (i.e., full package) High social and environmental compliance Product mix Low average defect rate Short order-to-delivery cycle time High flexibility in size and scale 4. Mark with an X which of the following issues (if any) have caused your company to take any of the described actions: Action Withdraw from Choose one Withdraw from a country supplier/ a supplier/ (specify if it business business Choose one was a Latin partner over partner over country over American Issue of Concern another another another country) High workforce skills Low cost of production other than labor High workforce productivity Low labor cost High product quality Fast speed-to-market Sophisticated level of services (i.e., full package) High social and environmental compliance Product mix Low average defect rate Short order-to-delivery cycle time High flexibility in size and scale A N N E X E S 5 7 5. What are the mechanisms to contract a new supplier? How long does it take? 6. What type of contracts do you usually have with your suppliers? How long do these take to implement? 7. Which countries are Peru's main competitors? How does Peru rate against competitors or key international ex- porters such as China, Mexico, India, Pakistan, Bangladesh, other Southeast Asian countries, Caribbean basin coun- tries, and other countries? 8. How do you assess quality and outside standards? a. International standards, ISO 14000 b. Other metrics (please specify). 9. What is your policy on defective products/low-quality products? a. Return entire order b. Return partial order c. Discount price d. Other 10. What is your policy on delayed delivery? a. Return entire order b. Return partial order c, Discount price d. Other C. PERUVIAN INDUSTRY QUESTIONS 11. How many factories do you work with in Peru? Large (>500 Medium SMEs workers) (100­500 workers) (<100 workers) Number of factories Increased/decreased/stayed the same during the last 5 years? 12. What type of products are you currently buying from Peru? Please state SITC codes. Currently buying from Peru (Yes/No) SITC codes Raw cotton Yarn Woven fabric Knotted fabric Apparel: --Women's --Men's --Children's --Other 5 8 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H 13. Which countries do you consider to be Peru's biggest competitors for the following products? Overall satisfaction (scale 1­10) Competitor as a supplier with: Peru vs. Competitor(s) country (countries) Peru Competitor(s) Positives Negatives Cotton Yarn Fabric--woven Fabric--knitted Apparel--T-shirt Apparel--Men's shirt Apparel--Women's blouse 14. What is the average defect rate from the average factory in Peru? In your sourcing experience, what is the average defect rate from all your source countries? 15. Describe the level of integration with your suppliers, and Peruvian suppliers in particular. Do you provide any of the following? Overall Peru Technical support Credit Training Fabric, inputs, accessories R&D support Design Other 16. What are other weaknesses in the Peruvian industry? 17. Do you have any suggestions for how Peru can improve its performance? 18. What have been your experiences in sourcing from SMEs in Peru (key challenges might include labor issues, qual- ity, timeliness, informality, other)? a. Are these issues specific to Peruvian SMEs or similar to other countries (Yes/No)? b. What specific steps could be taken in Peru to make it easier/more efficient for you to source from SMEs in the country? 19. How would you describe Peru's textile/apparel industry in one sentence? A N N E X E S 5 9 B. INTERNATIONAL TEXTILE AND APPAREL CONTEXT 20. Do you think the international market for textile and apparel is changing? How? · What are the key changes in supply, demand, and prices? · Do you think the expiration of the safeguards against China in 2008 will change this picture? If so, how? 21. How are these trends affecting your purchasing decisions? Do you look for new markets you did not con- sider before? How is the growing presence of China in the market affecting your buying conduct? 22. Specify how trade agreements are affecting your sourcing patterns. 23. Do you think countries are specializing in different segments of the industry (i.e., profiling themselves as a specific kind of supplier)? Specify which countries and their specialty. 6 0 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Annex 5 INCOTERMS Origin Terms CIP: Carriage and Insurance Paid To, named place or port of destination. EXW: Ex-Works, named place where shipment is This term is used for air or ocean containerized available to the buyer, not loaded. The seller will not and roll-on roll-off shipments. contract for any transportation. Arrival at Stated Destination International Carriage NOT Paid by Seller DAF: Delivered At Frontier, named place of destina- FCA: Free Carrier, unloaded at the seller's dock OR tion, by land, not unloaded. a named place where shipment is available to the in- This term is used for any mode of transportation ternational carrier or agent, not loaded. This term can but must be delivered by land. be used for any mode of transport. DES: Delivered Ex-Ship, named port of destination, FAS: Free Alongside Ship, named ocean port of ship- not unloaded. This term is used for ocean shipments ment. (Ocean shipments that are NOT containerized.) only. FOB: Free On Board vessel, named ocean port of DEQ: Delivered Ex-Quay, named port of destina- shipment. This term is used for ocean shipments tion, unloaded, not cleared. only where it is important that the goods pass the This term is used for ocean shipments only. ship's rail. DDU: Delivered Duty Unpaid, named place of des- International Carriage Paid by the Seller tination, not unloaded, not cleared. This term is used for any mode of transportation. CFR: Cost and Freight, named ocean port of destination. DDP: Delivered Duty Paid, named place of destina- This term is used for ocean shipments that are not tion, not unloaded, cleared. containerized. This term is used for any mode of transportation. CIF: Cost, Insurance and Freight, named ocean port Incoterms 2000 of destination. This term is used for ocean shipments that are not The following chart summarizes the responsibilities containerized. of both the buyer and seller for each of the current 13 INCOTERMS. CPT: Carriage Paid To, named place or port of destination. This term is used for air or ocean containerized and roll-on roll-off shipments. A N N E X E S 6 1 respon- DDP Duty Paid Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller is Delivered seller the DDU Duty Unpaid Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Seller Delivered where Carrier) Quay DEQ Duty Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Delivered Ex Unpaid (International DES Ex Ship Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Place Delivered Named DAF At FCA Buyer Buyer Buyer Delivered Frontier Seller Seller Seller Seller Seller Seller Seller Seller Seller and CIP oT freight; Paid Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Carriage Insurance inland for CPT oT Paid Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Carriage sponsible re not and CIF Cost Freight Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Insurance & goods the & CFR Cost Freight Seller Seller Seller Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer loading for only FOB Free Onboard esselV Seller Seller Seller Seller Seller Seller Buyer Seller Buyer Buyer Buyer Buyer responsible is ASF Free Ship Seller Seller Seller Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer seller Alongside the where FCA Free Carrier Seller Seller Seller Seller Buyer/ Seller* Buyer Buyer Buyer Buyer Buyer Buyer Buyer Premisess Ex orks Seller' EXW W Seller Seller Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer FCA terms: FCA two Storage Labor Fees s esselV Arrival & Freight Destination freight. Charges Charges On On Clearance oT actually Packing Freight axesT, inland are for arehouse arehouse Destination SERVICES W W Export Loading Inland erminalT There sible Forwarder' Loading Ocean/Air Charges At Duty Customs Delivery * 6 2 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Annex 6 Industry Competitiveness Indicators for Value Chain Analysis 1. Inputs 5. Product Quality a. Cost of key inputs (raw and intermediate) a. Number of rapid alerts b. Tariff on main imported inputs b. Defect rate c. Input conversion ratio c. Percentage share of exports d. Import dependency ratio d. Number of certified exporting firms/total e. Time to import (Doing Business Indicators) exporting firms (or total producing firms) f. Cost to Import (Doing Business Indicators) 6. Market Access 2. Factor of Prouction a. Order to delivery time (days/weeks) a. Wage/labor hour b. Tariff in key export markets b. Hiring/firing rigidities (Doing Business c. Time and cost to export (Doing Business Indicators) Indicators) c. Interest rate (long-term and working capital) d. Trade openness index d. Getting credit (Doing Business Indicators) e. Rate of return on capital 7. Business Environment f. Cost and time to lease industrial land a. Enforcing contracts (Doing Business g. Cost and time to purchase industrial land Indicators) b. Entry barriers (Doing Business Indicators) 3. Utilities c. Registering property (Doing Business- a. Electricity cost (US$/kwh) Indicators) b. Water cost (US$/cubic meter) d. Protecting investors (Doing Business c. Telecommunication cost (3-minute local Indicators) call) and % of firms using the Internet to e. Licenses interact with clients f. Senior management time spent on red tape d. Power outage (days) and % of sales lost (Enterprise Survey) (Enterprise Survey) g. Paying taxes (Doing Business Indicators) e. Number of days to get telephone connection 4. Productivity a. Value added per worker b. Output produced per labor hour c. Yield per hectare d. Value added per unit of investment e. FDI per value added f. Average production cost per unit A N N E X E S 6 3 Annex 7 Sample Policy Recommendations & Action Plan Matrix: Mozambique Tourism High Priority Initiatives Responsibility/ Monitoring Action Coordination Time Frame Indicators 1. Ease and Costs of Access into Mozambique · Provide and publicize clear information for visitors of entry/exit MITUR; Customs; Short- No. of nationalities of key requirements and train immigration and airport staff to under- Ministry of Foreign Medium source markets with visa stand how to handle tourist expectations at entry/exit points. Affairs Term exemptions · Remove visa requirement for major source markets, and stream- Publications produced, line frontier formalities (entry/exit) to reduce waiting times at printed and readily borders Also strengthen border processing capacity and available at entry points intensify negotiations on one-stop border posts with South No. of hours it takes to Africa and other selected transport corridors around the country. pass through border posts · Accelerate implementation of UNIVISA No. of days/hours it takes · Also mechanisms to enable tour operators to pre-arrange visa for nationals of key source and entry permits should be established. markets to obtain visas · Establish payment system and modalities to allow foreign Airport Authority, Civil Short- No. of domestic airline travel agents and operators to issue air tickets, and access Aviation Authority, Medium tickets sold by tour airline seat inventories Ministry of Transport, term operators · Revisit bilateral air service agreements with the EU countries Airlines No. of back-to-back and key hubs in Africa (particularly South Africa) to facilitate Coordinate with World charter operations higher capacity and flexibility for direct flights to Maputo, Bank Communications conducted by charter Vilanculos, and Pemba. Also revise policy on charters to allow Project air transport airlines for more frequent/flexible back-to-back operations component No. hours taken to clear · Review airport policies and establish monitoring systems at customs in airport airports to measure performance and progress in service quality No. of baggage lost improvements e.g. customs, immigration, delays, baggage- complaints filed related complaints. Carry out detailed audit and assessment of Airport capacity to handle airport infrastructure improvement needs, starting with larger aircraft extension of runway and night flying equipment in Vilanculos · Examine and resolve issues that originate from key regional connection points to Mozambique--particularly Johannesburg airport which is the source of many lost/stolen baggage, slow processing of insurance claims, and so on. 2. Improve Availability & Quality of Hotels, Tour Operators and Other Hospitality Services · Provide investors in hotels and other establishments with a one- MITUR, with Inter- Medium Guidelines issued and stop source of accurate information and processing of user ministerial Committee, Term regulations in effect. rights on land, with clear delineation of roles and responsi- Provincial governments No. of days taken to bilities between the different levels of government. Also (relevant departments). secure a Duat promote a pro-active system of community-driven preparation of Ministry of Planning. No. of disputes resolved land for tourism based investment and activities. Here, all land PEP Africa's Tourism between investors and issues are dealt with, before hand, by the community itself, Anchor project (guide- communities prior to the investor's bid for such tourism assets lines for procedures to No. of days taken to secure land use rights) resolve disputes on user technical assistance to rights on land streamline administra- tive procedures) (Table continues next page) 6 4 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Sample Policy Recommendations & Action Plan Matrix: Mozambique Tourism High Priority Initiatives--continued Responsibility/ Monitoring Action Coordination Time Frame Indicators · Develop industry codes of practice and a functioning accredita- MITUR with INNOQ, Short- No. of accredited tour tion system for tour operators and related hospitality PoDE, Hotels asso- Medium operators and hospitality businesses (tour guides, divers, translators, airport taxis). ciation, Tour Operator Term service providers Establish a system to benchmark firm performance, and reward association and, other No. of beneficiaries of high performing firms within each industry. relevant Industry international exchange · Establish a systematic skills development program for tourism Associations; Hotel programs industry: Andalucia Increased tourist Augment curriculum and improve training in the Hotel Coordinate with the satisfaction Andalusia and Technical and Vocational Education and USAID ARC project in Training programs under the TVET project Cabo Delgado Training programs including staff exchange, between emerging Mozambique hospitality service providers (e.g. divers, tour operators, travel agents, hotel staff and middle management, handicraft etc) and their counterparts in key source/competing markets Increase level of private sector input and involvement in strategic decision making (e.g. at Board level) in these institutions. · Streamline administrative procedures--particularly licensing MITUR PoDE with Medium No. of days it takes to requirements and business start-up procedures for hospitality Ministry of Commerce Term secure business licenses firms including: tour operators, taxi companies, and other Upcoming FIAS-PEP No. and magnitude of ancillary service providers (restaurants and entertainment Africa project penalties against non- facilities) servicing the tourism industry. Also implement clear performing license owners Coordinate with USAID penalties to discourage license hoarding and World Bank TFCA project 3. Marketing, Product Development and Maintenance of Tourism Assets · Establish responsibility for restoring, maintaining and MITUR with Ministry of Medium Terms of Reference. marketing key existing tourism assets (e.g. the coastal Education and Culture Term Action plan with clear resources, Elephant Reserve, Ilha da Moçambique, Ethnology responsibilities Museum, etc.). Develop a sustainable financing plan for restoration and maintenance activities. Start with the Elephant Park and Ponto d'Oro. · Privatize the management of the Maputo Convention Center to Ministry of Foreign Short- Percentage monthly improve visibility, revenue and capacity utilization. Set up a Affairs, Maputo Medium capacity utilization of destination marketing organization that will promote tourism Convention Center; Term conference facilities (including MICE tourism) in Maputo Min. of Tourism, No. of events (domestic versus international) No. of total guests per month (domestic versus international) Revenues per month A N N E X E S 6 5 Sample Policy Recommendations & Action Plan Matrix: Mozambique Tourism High Priority Initiatives--continued Responsibility/ Monitoring Action Coordination Time Frame Indicators · Develop a coherent short-medium term strategy for tourism CPI Hotel Association Short- Adoption of an interim marketing CTA MITUR or FUTUR, Medium strategy with a one-year Pursue more aggressive joint marketing and collaboration Tour Operators Term action program between Mozambique and South Africa in order to leverage Coordinate with KfW Percentage of increased expected increases in tourists' visits due to the upcoming funded marketing plans government expenditure 2010 World Cup Championship for Inhambane on marketing Involve private sector actors along the value chain e.g. hotel Percentage of increased and tour operators; tour guides, airlines in marketing private expenditure in Mozambique as destination marketing (by typology of Define tourism image, and key source markets other than tourism business/firm) current sources No. of tourists Update and manage distribution of promotional material on No. of tour packages sold the country, including maps, schedules of events and country data, post cards, and so on, Effective participation in world travel market events promote e-tourism and on-line destination marketing techniques such as World Hotel link.com. Develop joint public-private funding mechanisms for marketing Improving Institutional Focus and Co-ordination · Intensify use of inter-ministerial committee to address key MITUR, Inter- Short- No. of tourism-related tourism industry issues such as: ministerial Committee Medium issues addressed and air transport issues with Civil Aviation Authority, Term resolved by the committee visa issues with Foreign Affairs Ministry, Clear cut difference in performance measures for managing tourism assets (e.g. infrastructure, public works, FUTUR, DINATUR, and urban and city transport development) MITUR review responsibilities for tourism development and marketing between MITUR, DINATUR, CPI and FUTUR to eliminate overlapping roles and activities. ACTION PLAN MATRIX--Other Areas Needing Attention Reduce Difficulty and Cost of Access · Complete implementation of 5th freedom rights for neighboring Ministry of Foreign Medium- No. of airlines taking African countries in line Yamoussoukro Declaration and SADC Affairs; MITUR and Long advantage of 5th freedom Protocol agreements Department of Civil Term rights within the region Aviation No. of route points served Coordinate with World by different airlines Bank Communications Regional air fares Project air transport component (Table continues next page) 6 6 M O V I N G T O WA R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H Sample Policy Recommendations & Action Plan Matrix: Mozambique Tourism High Priority Initiatives--continued Responsibility/ Monitoring Action Coordination Time Frame Indicators · Prioritize road investment program to consider need for Public Works/ Highway Short- Percentage increase in improved road networks in the North, through strategic Department, Ministry of Medium expenditure for road selection of O/ D points. Also improve road maintenance, Transport. MITUR Term maintenance activities signage and accessibility to key tourism assets (e.g. in Maputo Percentage increase in Elephant Reserve) kilometer roads networks effectively maintained. No. of tourism assets per Km2 with easy and adequate road access Strengthen Destination Management and Product Development in Provinces · Explore integrated tourism development zones as pilots that Local municipalities in Medium Integrated plan can be replicated. This should begin with the preparation of consultation with term integrated provincial tourism development plans starting with private sector, MITUR, Maputo and the Pemba- Quirimbas region to address physical Ministry of infrastructure development issues including zoning; land use Environmental standards, ceilings for carrying capacity. The plans should also Coordination (MICOA), include contingency arrangements to mitigate the damaging Ministry of Land and impact of natural occurrences (e.g. cyclones, mobile sand Urban Development. dunes, hurricanes) on key tourism assets. Integrated Coordinate with the Short- Natural disaster Development Plans are already underway for Vilanculos. World Bank TFCA Medium management plan · Develop clear national guidelines, modalities and standards for projects tourism Term Guidelines for cleaning up waste associated with natural occurrences (e.g. component; and with negotiations with floods, hurricanes) that damage the aesthetic/physical value of the DANIDA funded community and legal tourism assets (e.g. beaches). coastal zone manage- codes governing · Create appropriate institutional and legal framework for ment project with contractual relations. resolving disputes between community and investors, with MICOA in Vilankulos. respect to land use rights, compensation, and other agreements. Develop guidelines for investor interaction with community in Priority Areas for Tourism Development (PATIs) and Trans-frontier Conservation Areas (TFCAs). Improve Tourism Revenue Management and Data Gathering · Establish a monitoring framework geared towards tourism Ministry of Finance; Medium Published data. satellite accounting that would make tracking and MITUR, Hotel Associa- Term Total tax revenues and disbursement of tourism taxes and revenue transfers to be tion, Provincial Heads disbursement of revenues. more transparent and effective. Particular attention should be and Local Chiefs, MOF Action plan to redress any paid to strengthening the collection of tourism statistics from inefficiencies and peripheral provinces to facilitate more effective policy making. inadequacies in data collection. A N N E X E S 6 7 Sample Policy Recommendations & Action Plan Matrix: Mozambique Tourism High Priority Initiatives--continued Responsibility/ Monitoring Action Coordination Time Frame Indicators Strengthen Overall Safety and Environmental Standards in the Industry · Promote the adoption of appropriate international standards INNOQ with PODE, Medium No. of certified tourism- (e.g. ISO 7000 for management, ISO 14000 for management MITUR, Department of Term related businesses for environmental compliance, and others such as food safety and Civil Aviation, Airlines each respective standards security. Develop food safety and quality standards and (LAM), Airport (e.g. ISO14000) training compliance program for local food producers to meet Operators standards and quality requirement of supermarkets, and hotel chains. Review and monitor compliance with international aviation safety standards · Establish industry benchmarking system to monitor operational and competitive performance of the hotel industry relative to competing countries. Increase Investment and Local Value Added · Review the Investment Code to ensure a level playing field CPI and Min of Finance Short No. of tourism businesses between large and small hospitality establishments. Extend the Term taking advantage of benefits of the investment code to other stakeholders in the investment code benefits tourism value chain (e.g. tour operators and ancillary service No. increased level of providers--restaurants) domestic investments · More effective use of PoDE's investment outreach program flows due to investment code incentives · Revise taxes, tariffs and duties on imported equipment, Min of Finance, Medium Percentage of taxes and machinery, food and drinks and refurbished vehicles that are Ministry of Industry and term duties reduced by product important to quality of service in the tourism industry Trade group Percentage change in import prices of key tourism related input products Percentage change in quantity of imported tourism inputs due to revised taxes, duties and tariffs · Develop small scale financing and technical support for SMEs PODE; PEP Africa Short Revenues from handicrafts in handicrafts and other ancillary services term and ancillary services (from tourist expenditure surveys)