Value chain approach to increase production of RUTF/CSB

By Yuki Isogai

Yuki Isogai is Operations Officer for the Ethiopia Nutrition Project/Private Sector Development Specialist with the World Bank. She has a wide range of experiences in private sector development, including in areas of public private partnership (PPP), foreign direct investment (FDI) promotion, tourism development, micro small enterprise (MSE) development, and women entrepreneurship development.

In Ethiopia, 13.7 million people face chronic food insecurity. Out of this figure, the number of people who needed emergency food aid reached about 6.2 million in June 2009. An additional 7.5 million received aid in return for work on community projects as a part of the Productive Safety Net Programme (PSNP).

In September 2006, the Government of Ethiopia adopted its second Poverty Reduction Strategy Paper (PRSP), The 'Plan for Accelerated and Sustained Development to End Poverty' (PASDEP), called for the implementation of the National Nutrition Strategy (NNS) (formulated in 2005/2006) to achieve the Millennium Development Goal 1 (MDG1) for halving hunger, malnutrition and poverty. The National Nutrition Programme (NNP) was designed and launched in 2009 in order to implement the NNS. It encompasses Therapeutic Feeding Programmes (TFP), which utilise Ready-to-Use-Therapeutic-Foods (RUTF), and Targeted Supplementary Food Programmes (TSFP) which require Corn Soya Blend (CSB).

Local demand and supply of RUTF and CSB

The cost of treating the severely and moderately malnourished in Ethiopia is prohibitive since a large share of the feeding products, i.e. RUTF and CSB, must be imported. Table 1 reflects the local supply versus demand gap. Furthermore, it is not only the final feeding products that have to be imported. As the domestic supply of inputs is quite limited (Table 2), a large proportion of these, e.g. powdered milk and soya bean oil, also have to be imported. This means the price of RUTF produced in Ethiopia is quite high relative to other countries. This is highlighted in Table 3 where costs are compared with Malawi. In addition, the freight costs are substantial, e.g. in the case of the RUTF, Plumpy'nut, the air freight costs are $2.63/kg, while the production costs are $3.46/kg. The result is that only a limited share of the total number of malnourished people in Ethiopia can be treated using these products.

*Other costs includes labour, quality control, packaging, energy and overheads

The total value of imported inputs alone adds up to $45.99 million/year, while the total RUTF/CSB market is worth, on average, about $60 million/year. This market is significant, and while development partners (DPs) are willing to purchase RUTF from local producers, local production has not met the demand so far (reflected in Table 1). However, investments in these products are profitable. For example, according to a feasibility study on powdered milk conducted by the Amhara Investment Office, the simple rate of return is 27.6%, which by any business standards, is profitable.

Thus, it appears that opportunities for developing agro-processing businesses within Ethiopia have been missed. Furthermore, promotion of local production of these products would improve the coverage/timeliness of the treatment of malnutrition and contribute to import substitution.

Why are local producers not meeting market demand?

Given the large market, the question arises, why the private sector in Ethiopia has not yet responded to meet this need, particularly since DPs are willing to procure the products from local producers. The World Bank Ethiopian Nutrition Team has conducted a thorough review of this question and identified three major issues, which are interlinked with each other: lack of market information, low access to finance and a weak value chain (see Figure 1).

Lack of market information

As a number of actors are involved between the farmers and the customers and the chain is quite segmented, market signals are not flowing down through suppliers. Thus, producers, including input suppliers and farmers, do not respond to the market as much as they could.

Low access to finance

Commercial banks normally consider the risks of agro-processing business so high that the level of collateral for related investment is set very high (up to 200%). In addition, the banking sector lacks capacity to evaluate properly the risks of new business areas, like RUTF/CSB production. Therefore, processing companies cannot obtain loans from banks for both capital investment and working capital.

The existing processing companies particularly suffer from lack of working capital. As agricultural products are normally available for only six months after the harvest due to lack of storage, the factories have to purchase inputs during the six months for the whole year of operation. This requires quite substantial working capital. However, banks are reluctant to lend working capital without high collateral, although a loan for working capital is for shortterm investment which is low risk. As a result, the operation rate (actual production/production capacity) of these factories is very low, e.g. average of 40% or even less.

Weak value chain

Even if the factories had enough working capital to purchase all required inputs, a problem still remains. There is insufficient supply of quality inputs. This applies for the whole value chain, i.e. RUTF/CSB producers and inputs (oil/powdered milk suppliers). Improvement in the quality and stability of input supply throughout the value chain is essential to increase the operation rate and reduce the level of risk for the industry.

Value Chain Approach with strong Public Private Partnership (PPP)

As reflected in Figure 1, production cannot be increased through a conventional approach that focuses on only one of the issues. All the issues affecting the value chain need to be tackled at the same time. To do so, a strong Public Private Partnership (PPP) involving private companies, commercial banks, farms, NGOs supporting farmers, UNICEF, WFP and the World Bank is required. Each actor will need to play a distinct role at various links in the chain. Production will not increase if one link is broken.

DP: Development partner; TA: Technical assistance; MFI: Micro-finance initiative

To improve the market information flow, DPs including the World Bank, can conduct feasibility studies and organise dissemination workshops, inviting a wide range of stakeholders, i.e. farmers, investors and bankers. This will improve understanding of the market amongst key actors.

Bank reluctance to lend to what they perceive as high risk agribusiness, unless businesses have large collateral, could be addressed through 'guarantee funds'. These funds cover a certain percentage of defaults, could be provided by DPs and would help to significantly reduce the risk for banks. At the same time, technical assistance (TA) to the banking sector is a key to improve their capacity to evaluate the profitability/feasibility of new businesses.

The perception of banks that the agribusiness sector carries risk is not completely unfounded. Due to the relatively primitive production systems at farm level, the existing processing companies have to operate factories with unstable supplies of inputs. New investors therefore hesitate to enter the business as a 'high tech' factory cannot be operated without a strong supply chain. At the same time, there are several NGO projects supporting small farmers to improve the productivity and quality of agro-products which are seeking markets (producers). Support for processing companies should be linked to these efforts on the ground.

The advantages of the value chain approach to increase the production of RUTF/CSB are:

• The targeted market is large and relatively secured by development partner's funds
• A value chain approach simultaneously supports different elements of the value chain, e.g. RUTF producers, groundnut farmers, milk powder producers, thereby creating synergy of impact. This contrasts with more conventional approaches where there is less joined up support.
• It has cross-sectoral effects, i.e. impact on humanitarian activities and national economic growth
• It significantly contributes to import substitution
• It improves the access to and the timeliness of delivery of relevant food products for needy beneficiaries.

As a pilot study, the Ethiopia World Bank Nutrition team has conducted a thorough feasibility study of powdered milk production and means of promoting an investment and link to NGO funded dairy projects, as well as the RUTF producers.

For more information, contact: Yuki Isogai, email: yisogai@worldbank.org