http://www.worldbank.org/ #competition4dev GUIDE FOR POLICY-MAKERS PRO COMPETITION MARKET SOLUTIONS TO ADDRESS KEY BOTTLENECKS IN SENEGAL’S GROUNDNUT VALUE CHAIN The Government of SENEGAL is developing a new strategy to improve the competitiveness of the GROUNDNUT SECTOR, aimed at reestablishing Senegal as a LEADING PRODUCER OF GROUNDNUTS. This note IDENTIFIES KEY BOTTLENECKS to competition along Senegal’s groundnut value chain that inhibit the sector from adapting to global trends, and realizing the Government’s priorities for the sector. The note focuses on three markets along the groundnut value chain that are key for shaping market outcomes for farmers, consumers and job creation: the INPUT MARKET, the MARKET FOR BUYING RAW GROUNDNUT and the MARKET FOR VEGETABLE OILS. It provides POLICY RECOMMENDATIONS for pro-competition reforms, that if implemented, are estimated to GENERATE OVER USD$250 MILLION for all actors across Senegal’s groundnut value chain, CREATE EMPLOYMENT FOR SENEGAL’S RURAL POOR WOMEN and LIFT 50,000 SENEGALESE OUT OF POVERTY. Pro-competition market solutions Pro-competition market solutions Pro-competition market solutions ▪ Remove anticompetitive regulation ▪ Remove anticompetitive regulation ▪ Remove anticompetitive regulation ▪ Promote a level playing eld ▪ Promote a level playing eld ▪ Promote a level playing eld ▪ Open markets SECTOR ISSUE 1: SECTOR ISSUE 4: SECTOR ISSUE 6: Limited certi ed seed availability Ensuring throughput for Oil consumer prices § Scope to improve allocation of local processors § Lack of competitive local industry raises prices pre-base seed § Lack of quality inputs § Import tari s on vegetable oils (palm, soy) PSE Objectives § Scope to improve allocation of seed § Lack of market driven farmgate price § Price controls on oil under subsidy scheme signal that can compete with export price 1 Increase Export production and productivity Seed 1 ! 2 ! provision Raw nuts Sale of Purchasing/ edible nuts in shell Shelling 2 Fertilizer production Transport ! ! Encourage ! provision Buying from farmers Crude oil Re ning of diversi cation Input Market ! production dom. oil 3 Import of Import of 3 crude oil re ned oil Develop visible Crude Oil Market Re ned Oil Market groundnut oil sector SECTOR ISSUE 2: SECTOR ISSUE 3: SECTOR ISSUE 5: Limited fertilizer availability Low farmer incomes How to build local value addition? § Distortions in tender process § Minimum price set through § Export tax disincentivizes local whole nut value addition for fertilizer subsidy negotiation at the CNIA § Narrow targeting of state support may not allow for entry and sti e innovation Pro-competition market Pro-competition market solutions solutions ▪ Remove anticompetitive regulation Pro-competition market solutions ▪ Remove anticompetitive ▪ Promote a level playing eld ▪ Remove anticompetitive regulation regulation ▪ Promote a level playing eld ▪ Promote a level playing eld ▪ Open markets GROUNDNUTS ARE IMPORTANT FOR SENEGAL Groundnuts play a CRUCIAL role in Senegal’s agricultural sector (Figure 1), and constitute a priority for the Senegalese government due to the sector’s ECONOMIC IMPORTANCE. FIGURE 1: Senegal’s groundnut sector Employs 482,000 Senegalese farmers 9 th largest 63% of farming population 40% of population groundnut oil producer ⁄ arable land 15 th largest groundnut producer dedicated to groundnut farming Groundnuts contribute approximately Groundnuts contribute 60% ⁄ export revenue Agricultural GDP SENEGAL’S GROUNDNUT SECTOR: POLICY OBJECTIVES Senegal’s economic development blueprint—the Plan Sénégal Emergent 2014 (PSE)—highlights THREE KEY OBJECTIVES for the groundnut sector (Figure 2)—aimed at BOOSTING PRODUCTIVITY, ENCOURAGING DIVERSIFICATION and DEVELOPING A VIABLE GROUNDNUT OIL PROCESSING SECTOR (despite the current lack of pro tability in the groundnut oil industry). Procompetition interventions are important to achieve Senegal’s objectives for the groundnut sector. FIGURE 2: Plan Sénégal Emergent 2014 key objectives for groundnut sector PRODUCTION & 1 PRODUCTIVITY 2 DIVERSIFICATION Increase groundnut yields Replace 10–20% of by +50% by 2020 groundnut oil production with edible nuts by 2023 The three objectives are linked 3 COMPETITIVE OIL INDUSTRY through market SENEGAL Replace 20–30% imported oil consumption of dynamics EMERGENT with locally produced groundnut oil POTENTIAL FOR ENHANCED SECTOR PERFORMANCE There is now an important opportunity for the Government to FOCUS POLICY EFFORTS and IMPLEMENT PRO COMPETITION INTERVENTIONS to align Senegal with current and projected global trends and demand. This will enable the country to ACHIEVE the objectives of the PSE and IMPROVE the sector performance. Senegal is WELL PLACED to take advantage of the global shift AWAY FROM GROUNDNUT OIL, and TOWARDS WHOLE GROUNDNUTS (and especially high-quality whole groundnut, such as those for confectionery and snacks)—if the right market policies are put in place to facilitate that shift ( gure 3). Senegal typically produces around 1 million tons of groundnuts a year —most of which is ultimately exported ( gure 4). FIGURE 3: Primary uses FIGURE 4: Senegal’s global exports of groundnuts (oil equivalent) and oil (1990–2016) of Senegalese raw 1,200 groundnut production Groundnut oil equivalent 1,000 Exports Groundnut (oil equivalent) (2015/16 and 2016/17 data) in 1,000 tons 800 600 Groundnuts (1,000 tons) 400 200 35% 0 1990/91 1999/00 Exports Groundnut oil 2009/10 2015/16 EXPORTS Source: USDA (2017). Note: the global average oil extraction rate (OER) as reported by the USDA was used to convert groundnut seeds to oil equivalent. Pre-export tax: 350,000 tons This is well illustrated by the RISE IN DEMAND for FIGURE 5: Global groundnut exports by current top 5 exporters Senegalese groundnuts— (1974–2017) primarily from China and 1,600 Removal of India export ban Vietnam—after the government liberalized the 1,200 export of whole groundnuts China in 2013 (Figure 5). Senegal’s Argentina 800 smallholder farmers were a United States key bene ciary of this, with 25% the entry of exporters RAISING FARMGATE 400 SENEGAL ARTISANAL PRICES BY 0 PROCESSING 1974/75 1988/89 2002/03 2016/17 19 TO 40% higher than Source: USDA (2017) “Seggal” and the set minimum price. edible nuts: The shift towards WHOLE GROUNDNUTS PRODUCTION AND EXPORTS can be achieved despite a 250,000 tons steady decline of Senegal’s position as a leading exporter of groundnut oils in recent decades (Figure 6) in line with declining global demand for groundnut oil. The latter was mainly associated with the rise of relatively cheap palm and soy bean oil, and a shift of groundnut oil production closer to the major points 24% of consumption, such as China. A combination of global trends, OTHER USES FIGURE 6: Senegal's share in global exports of groundnuts and coupled with low throughput auto-consumption, groundnut oil (1972–2016) and a lack of pro-competition recycled seed, 60% market policies have meant Linear (Share in global post-harvest groundnut oil exports) Share in global that even Senegal’s largest 50% groundnut oil exports groundnut oil millers have handling loss: struggled to reach even half of 240,000 tons 40% their operating capacity, further 30% LOWERING THEIR GLOBAL 16% 20% COMPETITIVENESS. This is despite export taxes Domestic groundnut introduced in the 2016/17 oil production: 10% Share in global season that allowed groundnut exports 160,000 tons Senegalese millers to compete 0% 1975/76 1985/86 1995/96 2005/06 2015/16 with exporters able to pay Source: authors’ visualization, various sources Source: USDA (2017) higher prices for whole groundnuts. SENEGAL’S GROUNDNUT SECTOR: 3 KEY MARKETS Digging deeper into the value chain, THREE MAIN MARKETS 1 INPUT SEED AND FERTILIZER MARKETS; require attention: (i) (ii) the FARMGATE MARKET; and, (iii) 2 3 the GROUNDNUT AND OTHER VEGETABLE OIL PRODUCTION MARKET. These are all interlinked and part of the PSE objectives. Tackling priority issues from a markets and competition perspective is key for the value chain development and can complement broader Government interventions on market development, such as the development of adequate quality and standards, irrigation systems, and contract farming as well as risk mitigating measures for farmers, such as crop insurance and measures for social protection. Market dynamics in buying markets determine farmer incentives to produce and invest in inputs, as well as the ability of the processing industry to access groundnut inputs. Competition in the processing industry: (i) incentivizes innovation to expand the range of value added products, and (ii) boosts the international competitiveness of groundnut products including oil—which currently receives a fair amount of state support. This would increase the ability for Senegal to export and allow for import substitution in products where this is e cient. Increased productivity and greater diversity of products should boost competition in the market for farmer produce, thus complete the virtuous circle (Figure 7). Ultimately, if markets function well and allow for competition between players, a virtuous circle between key market players in the value chain can lead to welfare gains for consumers (through lower consumer prices), farmers (through increased incomes), and can help boost international competitiveness and create better jobs. The next section explores current market policies which may prevent this from happening—and suggests how these might be addressed. FIGURE 7: A virtuous circle between Senegal's three key markets in the groundnut value chain and their link to the PSE objectives Farmers Export market Competition in the market for Farmer buying raw income 1 groundnut Competition in Productivity the domestic Employment processing 3 market 2 Consumer prices Consumer welfare Source: authors’ visualization KEY BOTTLENECKS AND RESTRICTIONS TO COMPETITION AND THEIR IMPLICATIONS FOR THE GROUNDNUT SECTOR The Government intervenes in the groundnut sector at all stages of the value chain with the aim of SUPPORTING SENEGALESE OIL MILLERS AND FARMERS FIGURE 8: Implications of rules AND IMPROVING ITS COMPETITIVENESS. These interventions in the market that restrict competition in are both indirect (through policies and regulation that set the rules for market Senegal's groundnut sector functioning) such as export taxes on groundnuts or import tari s on vegetable oils, and direct (through Government ownership of market players) as well as through 14 million Senegalese consumers an active participation in the value chain organization through the Comité National pay up to 60% higher prices for Interprofessionnel de l'Arachide (CNIA). In some cases, however, such interventions vegetable oil, which is a substitute may unintentionally introduce distortions into the value chain that restrict market for groundnut oil functioning and distort the incentives or ability of various market players—including farmers, traders and processors—to invest, compete and expand. Such distortions to market functioning can hinder competition and 482,000 farmers incomes negatively obstruct the signals and incentives that would otherwise characterize productive a ected linkages between market players. GOVERNMENT INTERVENTIONS that restrict competition in the groundnut 1.6 million households value chain may contribute to a lack of high-quality inputs and thus low yields, could gain from more which RAISES COSTS FOR PROCESSORS by making it more di cult for them a ordable vegetable oil to reach an e cient scale of operation 10% decrease (Figure 8). This exacerbates the sector’s limited export competitiveness. in price of palm Senegal’s Moreover, the Government’s previous measures to secure throughputs for local and vegetable domestic oil processors, while xing minimum process for farmers (e.g. through purchase oils could lift processors subsidies and by preventing exporters from buying from farmers) in fact 50,000 operate NEGATIVELY AFFECTED FARMER INCOMES because it reduced the price people below 50% exporters were willing to pay farmers, and are likely to have dampened out of capacity incentives for production by hampering competition for farmers’ produce. poverty Exports restrictions initially designed to stimulate the local groundnut processing industry have not encouraged local value addition of whole nuts for export, what is particularly relevant for snack groundnuts, where Senegal has a strong competitive advantage. While the groundnut processing industry (which Current policies limit employs an estimated 2,000 people) receives protections, these would have employment potential come at the expense of over 480,000 farmers and those employed in value of groundnut value chain addition for whole nuts for export. Government interventions in the groundnut sector may also unintentionally result in higher prices for vegetable oils (which Source: authors’ visualization, various sources are substitutes for groundnut oil), negatively a ecting the welfare of over 14 million consumers in Senegal. Tackling priority issues from a markets and competition perspective is key for the value chain development and can complement broader Government interventions on market development, such as the development of adequate quality and standards, irrigation systems, and contract farming as well as risk mitigating measures for farmers, such as crop insurance and measures for social protection. Photo: V. Meadu (CCAFS). (CC BY-NC-SA 2.0), with modi cations. PRO COMPETITION POLICY RECOMMENDATIONS TO ACHIEVE GOVERNMENT OBJECTIVES FOR SENEGAL’S GROUNDNUT SECTOR 1 Input markets – SEED AND FERTILIZER The Government participates in input provision. However, the characteristics of this participation can lead to ine ciencies along the groundnut value chain. SEED: Several interrelated and reinforcing factors create ine ciencies in Senegal’s seed market, including: ▪ The government’s research institution ISRA (Institut Sénégalais de Recherches Agricoles), which holds a monopoly over the production of pre-base seed, is not currently able to produce su cient pre-base seed to satisfy demand. ▪ The current method of allocation of pre-base seed among multipliers does not appear to be based on market mechanisms that would allow for e cient multiplication. Thus, certi ed groundnut seeds are in short supply,3 and many farmers instead rely on planting whole groundnuts, which are not traceable and are of questionable quality, a ecting their competitiveness in international markets, such as the exports to the European Union4). ▪ The shortage of high-quality seeds contributes to Senegal’s low yields: while Senegal has a strong competitive advantage in the production and export of high-quality groundnuts, groundnut oil factories run at 25-50 percent of production capacity (mainly due to the current downward trend of groundnut oil prices5).6 A government-managed allocation/distribution mechanism of subsidized seeds may furthermore lead to an ine cient allocation of seed. . THE HIGHEST PRIORITY RECOMMENDATIONS TO ADDRESS BOTTLENECKS IN SENEGAL’S CERTIFIED SEED MARKET FOCUS ON REMOVING ANTICOMPETITIVE REGULATIONS. Other important pro-competition recommendations target promoting a level playing eld, and opening the input markets (Figure 9). FIGURE 9: Pro-competition market solutions to address bottlenecks in Senegal’s market for certi ed groundnut seed SECTOR ISSUE 1: Limited certi ed seed availability § First come rst served allocation for pre-base seed by monopoly parastatal Institut Sénégalais de Recherches Agricoles (ISRA) at xed price prevents allocation of limited pre-base seed to most e cient multipliers, reduces incentives for production of pre-base § Lack of incentive to develop a commercial certi ed seed channel due to lack of pre-base, crowding out of commercial sector by subsidy scheme and lack of clear criteria for allocation of seed under subsidy Seed Recommendation Responsibility Priority provision Certi ed seed availability Fertilizer Review reasons that ISRA does not produce su cient pre-base seed to ful ll market MAER, ISRA High provision demand. Input Market Implement a pricing mechanism for pre-base seed that allows ISRA to satisfy demand MAER, ISRA High for seed and cover costs. As a complementary measure, put in place mechanisms of traceability and transparency, e.g. a seed e-platform. Consider whether ISRA could provide breeder seed to private players to allow for MAER, ISRA High increased production. As a complementary measure, identify ISRA’s public good elements and allocate funds. Re ne and operationalize subsidy schemes that allow for competition between MAER High distributors/seed companies e.g. voucher scheme. Allow private sector to choose geographical allocation of seeds based on demand, MAER Medium except in the case of market failures. Source: Senegal: Better Markets for All through Competition Policy, World Bank Group (July 2018). FERTILIZER: the government of Senegal subsidizes fertilizer and is involved in all stages from procurement to distribution. While subsidies are not necessarily bad, especially when they are designed to address speci c market failures, they can also create market distortions when their design and/or allocation confer undue advantages to certain market players over others. For subsidized fertilizer, the government engages in a public procurement process based on anticipated demand and then awards contracts to a few large providers. Overly restrictive speci cations and conditions in tender rules in some cases appear to exclude potentially substitutable products, which could raise costs and restrict choices for farmers. As part of the procurement contract, providers are required to deliver fertilizer only to speci c locations determined by the government. These rules limit the ability of market incentives to contribute to an e cient allocation of fertilizers, better quality provision based on soil requirements, their timeliness and better prices. According to WBG estimates, such issues may contribute to raising domestic fertilizer prices up to 51% over international prices, and means that subsidized fertilizer can be up to 20% more expensive than under private channels. Priority recommendations to address bottlenecks in Senegal’s fertilizer market focus on removing anticompetitive regulations and promoting a level playing eld (Figure 10). FIGURE 10: Pro-competition market solutions to address bottlenecks in Senegal’s market for fertilizer SECTOR ISSUE 2: Outcomes: Limited fertilizer availability § 4 players dominate the rms selected for import/distribution of urea Bottlenecks in tender process: (89% of total volume) § Overly restrictive formula speci cations § One player dominates for most widely used fertilizer for government tenders can limit entry § Two (state-owned) producers of phosphates complex fertilizer in of potential substitute speci cations Senegal § Prohibition on bulk blends raises cost § Domestic prices appear to be disconnected from international prices and excludes players from Mali, Burkina § Domestic prices have been around 51% higher than international Faso, Cote d’Ivoire and Guinea prices on average between 2010 and 2013 § Informal tender bonus is provided to § Fertilizer through subsidized channel (c.23% of total) is 20% more distributors who agree to buy from ICS expensive than under private channel Seed Recommendation Responsibility Priority provision Fertilizer availability Fertilizer Review the costs and bene ts of maintaining restrictive formula speci cations in MAER High provision Government tenders. Input Market Consider allowing bulk blends for tenders. MAER High Formally delink tender award for subsidized fertilizer distribution from bidder’s MAER High choice of supplier. Operationalize subsidy schemes which allow for competition between distributors MAER High and greater choice for consumers, e.g. voucher scheme. As a complementary measure, consider State support for inputs (fertilizers and MAER, ISRA High seeds) in the context of contract farming schemes to promote diversi cation, and the dissemination of climate smart agricultural technologies, especially to boost production in areas a ected by climate shocks. Source: Senegal: Better Markets for All through Competition Policy, World Bank Group (July 2018). 2 Farmgate market for RAW GROUNDNUT The functioning of the market for buying raw groundnut from farmers—the farmgate market— is a ected not only by market characteristics but also by policy-related distortions, which adversely impact farmers’ incomes and negatively a ect processing and domestic value addition. Following the removal of a ban on groundnut exports, many farmers opted to sell their produce to exporters willing to pay higher prices than domestic processors. The Government put in place an export tax on groundnuts during the 2016/17 season. This tax was intended to be a measure to protect the domestic processing industry, including the state-owned enterprise SONACOS, as well as, kept at a low level, a means of revenue collection for reinvestment into providing public goods to ensure product quality. The tax was albeit suspended in late 2017. The tax had led to a boycott (primarily by Chinese traders) and slow sales of groundnut towards the end of 2017, which in turn lowered farmer incomes. Furthermore, the incidence of the tax fell more heavily on shelled nuts than on unprocessed nuts in shell, discouraging local value addition and better market outcomes. In the past, export restrictions also strengthened the market position of so-called OPS, the licensed buyers for domestic oil producers. This provided them with advantages over potentially competing buyers beyond the fact that they already appear to bene t from a well-established infrastructure of collection points as well as other advantages such as cheaper access to nance.7 Other aspects of the value chain may continue to hinder entry and market dynamics. A key example is the determination of several important market parameters by the Comité National Interprofessionnel de l'Arachide (CNIA)—a body made of market players including producer representatives, processors, and so-called opérateurs privés stockeurs (OPS)—as part of its role in managing the value chain. With the approval of the Government, the CNIA sets the season’s minimum price for groundnuts, which applies to all purchases from farmers made by OPS and other formal collectors. This essentially eliminates the possibility of processors competing to raise the prices paid to farmers and thus channeling raw inputs to the most productive use. The e ects of removing minimum farmgate prices for farmers can be mitigated through other instruments, such as social safety nets in case of the poorest. Given its mandate, the representation of market players on the CNIA—and their relative bargaining power—is a key determinant of market outcomes, for example setting prices. According to stakeholder interviews, bargaining power has tended to lie with local processors rather than with producers, and because the membership structure of the CNIA has not been reformed in recent years, it does not necessarily re ect the current realities of the value chain. In particular, there does not seem to be a formal mechanism to allow representation by new entrants or potential entrants, which may put these players at a disadvantage versus incumbents since members of CNIA have the ability to in uence certain market parameters, such as the minimum price, the division of collection points, or the length of the season, to the detriment of entrants. Subsidies traditionally provided to oil producers for the purchase of groundnuts at the minimum price may also unlevel the playing eld if they target certain oil producers, conferring them with an advantage over others. In addition to this subsidy, the State-owned SONACOS, Senegal’s largest groundnut oil producer may bene t from additional advantages in the market for procuring groundnut over its private sector rivals, including through the Government - procured loans. The Government should ensure that  both public and private actors have equal opportunity to access to nance to guarantee competitively neutral markets. Furthermore, to maximize nance for development, the Government should encourage private investment along the value chain to optimize public resources and invest them in public goods that contribute to increasing productivity, such as research, transport infrastructure). Further, investment in raw groundnuts can also unleash the potential of the processed groundnuts (snacks) market, which represents an estimated 39.3 percent pro t margin for Senegal. In particular, exports of confectionery groundnuts present a pro table opportunity for Senegal, given the growing demand of confectionery in Africa and Asia. This opportunity requires investments in high-quality standards, such as a atoxin detection and control mechanisms, to respond to consumer trends and quality requirements in importer countries. For instance, in Europe, consumers favor avored groundnuts and snacks, confectionery or chocolate products over groundnut oil and cake. Some countries like India, Argentina or Brazil have improved standards to align their domestic production with international demand and became leading groundnut exporters globally. In India, the government has successfully encouraged groundnut producers to invest in standards for quality increase, processing and storage technology to adapt to these trends. Argentina, the second larger groundnut exporter worldwide, has invested in technology, marketing and quality standards to integrate their domestic groundnut industry into global markets. Brazil also managed to become a groundnut exporter by investing in these three areas and creating a quality control label or “pro-peanut label”. Similarly, Nigeria and Ghana have introduced measures to improve standards, notably a atoxin detection and control. Key recommendations to boost farmer incomes focus on REMOVING EXISTING ANTICOMPETITIVE REGULATION and INTRODUCING MECHANISMS TO PROMOTE A LEVEL PLAYING FIELD IN THE SECTOR (Figure 11). Recommendations to boost farmer income will likewise drive throughput for local processors and build local value addition. Additional recommendations to build local value addition focus on removing anticompetitive regulation, promoting a level playing eld, and opening markets (Figure 12). FIGURE 11: Pro-competition market solutions to address bottlenecks a ecting Senegalese groundnut farmer incomes Seed provision Raw nuts Purchasing/ in shell Transport Fertilizer production provision Buying from farmers Input Market SECTOR ISSUE 3: Recommendation Responsibility Priority Farmer incomes Farmer incomes § Export tax reduces the price that exporters are willing to pay to farmers Consider reforming export restrictions, such as the Government High § Variables that directly a ect farmer incomes export tax on groundnuts. and choices are managed and agreed Review the role of the CNIA in the development CNIA, CNIA High amongst stakeholders at the Comité of the sector. Develop guidelines on its mandate stakeholders, National Interprofessionnel de l‘Arachide to rationalize its involvement in determining MAER (CNIA) forum, where bargaining power market parameters (e.g. prices and geographic appears to lie with buyers allocation) and on exchange of information s Minimum purchase price acts as a focal in order to minimize the risk of facilitating point for the realized price o ered by anticompetitive outcomes. buyers/processors Review membership of the CNIA and develop CNIA, CNIA High s Minimum price is set through a guidance to ensure adequate representation of stakeholders negotiation at the CNIA with the state producers and new/potential entrants. acting as an arbitrator between producers and processors—with the Remove restrictions that limit the number of CNIA, MAER Medium price based on an international buyers in a speci c area (e.g. collection point benchmark for crude oil restrictions speci ed by CNIA), including those s Groundnut collection points appear to a ecting exporters. be divided amongst opérateurs privés Strengthen the e ciency of input distribution MAER Medium stockeurs (OPS) through agreement markets and access to nance during sowing facilitated by CNIA forum which restrict seasons. competition within a certain geography As a complementary measure, promote contract CNIA, CNIA High § Ability for farmers to switch buyers is farming and better risk sharing between stakeholders hampered by their need to form longer term producers and buyers by encouraging them to relationships with OPS in order to ensure become involved in production nancing. input (fertilizer and seed) provision—this is partly due to ine ciencies in input distribution and nancial markets. In practice this means that the o ered price has at times been below the minimum price Source: Senegal: Better Markets for All through Competition Policy, World Bank Group (July 2018). FIGURE 12: Pro-competition market solutions to address bottlenecks to ensuring throughput for local producers and build local value addition Seed provision Raw nuts Purchasing/ in shell Transport Shelling Fertilizer production provision Buying from farmers Input Market SECTOR ISSUE 4: SECTOR ISSUE 5: Ensuring throughput for How to build local value addition? local processors § Lack of competition in local processing hinders e cient allocation of resources and § Lack of quality inputs reduces yields (see constrains productivity and does not allow for innovation and a timely response to restrictions above). towards international markets § Lack of competitiveness of local oil industry § Lack of competition in market for buying from farmers discourages participation of does not allow processors to compete with e cient rms in local processing prices paid by exporters even with subsidies § Export tax disincentivizes local whole nut value addition (inc. shelling, blanching, etc) (purchasing and operational) in place since “Nut in Shell” is taxed at a lower rate on export § Lack of market driven farmgate price signal § Narrow targeting of state support to certain types of products and players may not leads to an ine cient allocation of farmer allow for responsiveness to international market and innovation by incumbents on resources due to disconnect between local new products (e.g. trends towards export of whole nuts (blanched or confectionary) opportunities and farmer decision, e.g. § Narrow targeting of state support to certain types of products and players may not prices that do not re ect demand will lead to encourage entry by new rms since framework for access to incentives for new rms under-production is unde ned Recommendation Responsibility Priority Throughput for local processors and build local value addition* Overall drivers of throughput for local processors and building local value addition: § Competition in local processing drives e cient allocation of resources and boosts productivity § Competition in market for buying from farmers encourages participation of e cient rms in local processing These drivers can be achieved through implementing recommendations above–plus the following additional reforms: Accelerate incentives to increase the production of quality seeds to ensure adequate volumes for the local industry. MAER High Hence, facilitate competition between oil producers and other buyers, including exporters. Set clear objectives for state support to the industry through transparent criteria to minimize distortions, in the MAER, Ministry High framework of contracts. of Finance Consider removing set minimum farmgate price, while putting in place mechanisms to protect producers’ income (e.g. social CNIA, MAER Medium protection measures; production and export insurance; warehouse receipt). As a complementary measure, consider investing in improving quality standards and mechanisms for the detection and MAER, Ministry High control of a atoxin; setting a strategy to respond the growing demand of the confectionery. of Finance *In addition to the recommendations listed below, consider maintaining the removal of the purchasing subsidy for oil processors (in line with the previous policy). Source: Senegal: Better Markets for All through Competition Policy, World Bank Group (July 2018). 3 Market for VEGETABLE OILS Groundnut oil is part of the vegetable oil market which also includes palm oil and soy oil: for Senegal’s consumers, they are all substitutes for each other. In an e ort to protect and promote producers of groundnut oil, the Government imposes restrictions on palm and soy oil imports since these oils are cheaper alternatives for consumers. Oil producers also bene t from import restrictions on crude and re ned vegetable oils – but at the expense of consumers, particularly poor households. Import restrictions include high tari s (e.g. the ECOWAS tari of 35 percent on speci c goods that “contribute to the promotion of the region’s economic development” applied since 2015), occasional taxes on imports (e.g. “Taxe Conjoncturelle à l’Importation” until 2004, and then safeguards until 2008)10 and non-tari measures. Consumers are most a ected by import restrictions and tari s on palm and vegetable oils: over 50,000 people stand to be lifted out of poverty from a 10% decrease in the price of palm and vegetable oils. Recently, the Government, through the Ministry of Commerce, has shown support to a recently created platform (integrated by traders, producers, processors and consumers) to regulate oil imports in Senegal. The alleged policy objective is to render stability to the groundnut oil market and to ensure that re ned groundnut oil is only commercialized only to national traders. The analysis of the e ects of this policy protecting the domestic oil industry are yet to materialize and is not part of the current analysis.11 The policies restricting competition in the groundnut value chain appear to be harmful to the overall development of the sector. These policies may negatively a ect the Government’s objective to increase yields and production and farmer incomes in the long run. The processing industry receives the most explicit protections, but these come at a cost to farmers and consumers. Although producers have been usually taxed, the Government has also subsidized them depending on the year. This, together with ine ciencies in the inputs markets (especially seeds and fertilizer markets, and marketing), can hamper productivity. Furthermore, the processing industry receives the most explicit protections, and domestic processors end up bearing low price risk, that comes at a cost to farmers and consumers. In addition, domestic processors are struggling despite the distortionary protections they receive. This is because of production ine ciencies that persist due to the lack of competitive pressures. Moreover, these policies limit the employment potential of the value chain. Implementing recommendations in previous sections to address bottlenecks in input markets, farmer income and local value addition should impact consumers as local markets begin to function better, by reducing local prices and/or increasing the choice of products available. CONSUMER WELFARE WILL FURTHER BE ENHANCED THROUGH MEASURES TO REMOVE ANTICOMPETITIVE REGULATION AND PROMOTE A LEVEL PLAYING FIELD in Senegal’s vegetable oil value chain ( gure 13). FIGURE 13: Pro-competition market solutions to address high prices for oil Export Seed Raw nuts Sale of provision Purchasing/ edible nuts in shell Shelling Fertilizer Transport production provision Buying from farmers Crude oil Re ning of Input Market production dom. oil Import of Import of crude oil re ned oil Crude Oil Market Re ned Oil Market SECTOR ISSUE 6: Recommendation Responsibility Priority Consumer prices for vegetable oil Consumer prices for oil § Lack of competitiveness of and ine ciencies in the local groundnut value chain likely to raise market prices In addition to previous Government Medium § Historical Import tari s on vegetable oil disincentivizes entry recommendations . . . of substitutes for local groundnut oil and increases prices (at Consider removing the same time, protection measures for the sector did not import tari s on allow for expansion of peanut oil production): e.g. crude (and potentially s As at 2013: Adjusted overall tax of 47% on palm oil imports re ned) vegetable oil s Tax rate for re ned oils from outside WAEMU: 45% s Oil from inside WAEMU should be exempt from customs duties but ad hoc bans have been implemented in the past—e.g. 2010 ban aimed partly at imports from Cote d’Ivoire due to their high fat content § This has an impact on household incomes and poverty and in some cases has been dealt with through price controls on oils à 50,000+ people stand to be lifted out of poverty from a 10% decrease in the price of palm and vegetable oils Source: Senegal: Better Markets for All through Competition Policy, World Bank Group (July 2018). IMPLEMENTING A SUBSET OF PRO COMPETITION POLICY RECOMMENDATIONS COULD LEAD TO SIGNIFICANT GAINS FOR SENEGAL An estimate of the potential gains from implementing a subset of proposed feasible and impactful reforms indicates positive results. The subset of reforms includes the recent removal of purchasing subsidies, the recent suspension of the export tax on shelled nuts, along with: phasing out the setting of a minimum price and phasing out import restrictions on crude vegetable oil imports. This set of prudent reforms would help minimize market distortions and allow the government to achieve its policy objectives ( gure 16), without launching a full liberalization of the sector: a middle way. In addition, the Government can bene t from technological applications to help facilitate transactions and become more competitive in global markets. Innovative technologies can help reduce budget constraints, for instance, substituting subsidies by robots that can detect macronutrients. Some groundnut producing countries have already incorporated innovative technologies into their processes. For instance, India, has adopted a cloud technology and business intelligence system to disseminate information about sowing and harvesting to farmers and government o cials via SMS. In Nigeria, tractor technology has enabled small-scale farmers to request and pay tractor services via SMS and mobile money”, connecting them to a network of tractor owners. Implementing this set of reforms is estimated to generate bene ts for all value chain actors in excess of F CFA 150 billion (USD 250 million), create employment for rural poor women and lift 50,000 people out of poverty. If employed correctly, the policy reforms would increase farmer incomes, lower consumer prices, create employment and generate higher pro ts. Furthermore, if taken into consideration, these reforms should be accompanied by mechanisms that address the downside risk of market price uctuations on farmers, such as targeted cash transfers as well as climate and output risks, such as crop insurance. To optimize the public resources and invest them in public goods that contribute to increasing productivity (i.e. research, transport infrastructure), the Government could encourage private investment along the value chain. Crowding in private investment can help optimize the use of the public resources, while contribute to other goals such as good governance and environmental and social sustainability. To ensure and increase private sector access to various sources of nance (a wide range including from own-savings to agricultural investment funds), it is key for the Government of Senegal to provide an enabling environment for all private sector actors in agricultural value chains (farmers who are by far the largest current investors, input suppliers, processors, distributors, and marketers). This is not to say that this subset of reforms is necessarily what should be adopted by the Government or that other reforms would not be necessary—however, it does indicate the potential magnitude of gains that are available to the Government if reforms are implemented systematically and credibly. FIGURE 14: “The middle way”—implementing a subset of proposed recommendations could lead to signi cant gains for Senegal REFORM SCENARIO REFORM BENEFITS Proposed policy changes Increased • Phase out setting of minimum price of raw groundnut, coupled with mechanisms to farmer Short Term protect producers’ income • Phase out export tax on kernel (but continue to ensure balanced exprt tax on nuts in shell incomes • Phase out tari and non-tari barriers on crude vegetable oil imports Higher Fiscal implications revenues • Loss of revenue from various taxes of FCFA 13 to 32 billion (USD$24 million to 60 million) Employment for rural women from Transition period: export prices and quantities taxes adjust Increased pro ts for • Value chain shifts to meet market trends (e.g. from groundnut oil processing to kernel exports) • Imported crude oil is being re ned processors Lower prices • Jobs are created in shelling and potentially blanching, roasting etc. for consumers • Phasing out of import restrictions on crude oil lowers consumer prices Medium Term Monetary implications (authors’ estimates) • Pro ts from exports of whole nuts: FCFA 150 to 178 billion (USD$ 282 million to 335 million) 50,000 • Pro ts from local palm oil re ning: FCFA 15 to 22 billion (USD$28 million to 41 million) Senegalese Social implications lifted out • Thousands of additional jobs in local processing (shelling) for rural poor women, and of poverty improved employment conditions • Lower consumer prices: 50,000 lifted out of poverty More pro table Note: A detailed break-down of assumptions is available in the full WBG Senegal Report palm oil re ning Source: Senegal: Better Markets for All through Competition Policy, World Bank Group (July 2018). 1 This note was prepared by Georgiana Pop (Senior Economist), Sara Nyman (Economist), Julian Koschorke (Consultant), Philana Mugyenyi (Private Sector Specialist) and Marta Camiñas Mora (Consultant). This note summarizes key ndings and recommendations of a World Bank Group Report: Senegal: Better Markets for All through Competition Policy (July 2018) authored by Georgiana Pop (Senior Economist), Sara Nyman (Economist) Gonçalo Coelho (Consultant), Julian Koschorke (Consultant) and Marta Camiñas Mora (Consultant) from the Markets and Competition Policy Team. Martha Martinez Licetti (Lead Economist and Global Lead for Markets and Competition Policy) provided valuable advice. 2 During the 2015/16 season, Senegal produced 1.1 million tons of groundnuts. USDA. 2017. Production, Supply and Distribution Database. Available at: https://apps.fas.usda.gov/psdonline/app/index.html#/ app/home 3 Only roughly 25% of seed is certi ed. 4 80 percent of Senegal, Ghana and Tanzania’s exports of snack-nuts go to the EU, “of which 20 percent is rejected due to a atoxin (and sold in Eastern Europe (…))”. Senegal processing and export of snack-nuts to the EU has an estimated pro tability of 36.4 percent (compared to 25 percent in the case of Tanzania and 35 percent for Ghana). See SENSE 2016. Economic Analyses of Peanut Processing in Africa. 5 See “USDA Production, Supply and Distribution database” available at https://apps.fas.usda.gov/psdonline/app/index.html#/app/home as included in WBG presentation “Rentabilité de la chaine de valeurs de l’arachide au Sénégal: « Competitivite, avantage comparative et options politiques”, p.9, by Toure, A., Lead Agriculture Economist, April 2017. 6 Dakaractu. 2014. Le gouvernement veut éliminer graduellement les semences écrémées (ministre). Available at: http://www.dakaractu.com/Le-gouvernement-veut-eliminer-graduellement-les-semences- ecremees-ministre_a71043.html 7 European Commission. 2016. Analyse d'économie politique (PEA) des lières de l'arachide et du riz, p. 19 8 World Bank. 2015. Etude Diagnostique de la Chaîne de valeurs arachide au Sénégal: Propositions de réformes, p. 62 9 For example, the government procured a $75 million loan from the Islamic Trade Finance Corporation to ensure that SONACOS would be able to purchase throughput during the 2016/17 growing season. ITFC. 2016. USD 75 million Murabaha nancing agreement between ITFC and the government of Senegal for 2016–2017 groundnut campaign. Available at http://www.itfc-idb.org/en/content/usd-75-million- murabaha- nancing-agreement-between-itfc-and-government-senegal-2016-2017 10 Based on customs data. 11 See “Sénégal: Commercialisation de l'huile d'arachide ra née - L'Unacois jappo mobilise 1 milliard 500 millions de F CFA” available at http://fr.allafrica.com/stories/201805280103.html