Reviving the blossom
Alem Weldegerima is director-general of the Ethiopian Horticultural Development Agency (EHDA), a government body solely dedicated to supporting the horticulture sector which incorporates flower, fruits and vegetables and the herbs sectors. The so-called horticultural sector developed around the small private sector initiative which was focused on exploiting the soil, ecological and market-proximity opportunities that Ethiopia offers to flower growers. The initiative gained quick traction after the former Prime Minister got on board with the sector. Soon, the flower sector became the darling of the Ethiopian government with loads of policy incentives and special treatment pouring towards investors who wanted to join the sector. The general mood and the earlier growth moment are no longer with this sector, according to stakeholders. Although it is only two years since he took over as director-general of the EHDA, Alem has something to say about this claim and he sat down with Asrat Seyoum of The Reporter for an in-depth interview. Excerpts:
The Reporter: With regard to the cut flower sector, we know that for a long time there was high interest from the side of the government to diversify the market destinations for our products. Yet, with the exception of Germany, where a fraction of Ethiopia’s cut flower is sold directly, the bulk of Ethiopia’s cut flower export goes to the Netherlands. Why have we not succeeded in finding alternative markets?
Alem Weldegerima: There are always two factors at play when trying to diversify market destinations. The first and most important factor is producing a competitive product while the other is an all-out effort to find alternative markets. About 80 percent of our cut flower export is directed towards one market [the Dutch market]. If you also look at our fruits and vegetables exports as well it is restricted to regional markets. This is mainly connected to the capacity of our farms. Both the agency and the Ethiopian Horticulture Producers and Exports Associations are working around the clock to find alternatives and to diversify our product destinations. We have a working relationship with our foreign ministry and we get their help to track various buyer venues, buyers which are actually big enough to matter, and seize such opportunities.
We try to advice the association into letting its members know about the opportunities to diversify their market destinations. These include major global trade fairs. However, it does not mean that they attend all of these events in a bid to find market openings since they don’t have the capacity to do so; but they do attend some which really matter. In this process, the agency supports the investors by writing to the relevant agencies, for instance, to help them ship their sample products without being required to repatriate foreign exchange.
The fact of the matter is a lot of efforts have gone into this market diversification work although the success was limited. What we have come to understand from our stakeholder meeting in the past two years is that the diversification is becoming more important given the current status of the euro; it’s declined with regard to the dollar. The Euro has fallen significantly against the dollar; what was around a six- dollar difference in favor of the Euro in the past has now declined to only two.
Now, this has a number of impacts including a considerable undercutting effect to the purchasing power of the European market while also undermining the overall foreign exchange receipts of the nation from the export of these products since Ethiopia’s main export receipts is in Euros which would later be exchanged for dollars. Now, the lower value of Euro against the dollar, the lower, would be the overall Ethiopian export revenue for this sector.
So, this is not favorable both to the grower and the country as a whole. We have tried a number of things to break into new markets like Japan. We have identified Japan since the national carrier has an established flight there and can be instrumental to get our cut flower products to Japan. However, the results have been minuscule at least since the courage and the initiative of our flower growers to sell their product there was extremely low. The other is the issue of foreign exchange repatriation which is strictly an observed requirement in Ethiopia. So, the growers have to be confident enough in the new customers with which they forge market links since they are required to produce the proceeds of their export sales in dollars.
This is particularly true with alternative markets such as Russia. But, there are some projects that we are currently working on with JICA to help us break into the Japanese market. One way or the other, the agency has not yet given up on diversifying the market destinations. There are also some other new strategies, which I would not divulge here since they are still in the works, to help with this market diversification efforts. We have also gone to Kenya to gather their experience and how they were able to diversify.
Furthermore, there are also efforts directed towards accessing the US market since we have come to learn that there are some big potential buyers there. Previously, we have tried to bring to Ethiopia some ten big cut flower buyers in the US market but the market link just did not take root as we anticipated. The Russian market as well was one of our focus markets but given the current situation between Europe and Russia and the economic turmoil instigated there has made accessing the Russian market quite difficult. In fact, the severance of the supply chain from Europe to Russia has caused the markets in Europe and some grower countries to struggle with excess supply. So, at this time, Russia is not that attractive although efforts to access the Japanese and U.S. markets are still in the works.
We know that market diversification initiative especially to expand cut flower markets in Germany, Japan and Russia is an old one. Specifically, the Russian market expansion strategy was viewed as a remedial move for restricted Ethiopian flower exports. Why have we failed in that regard?
For the record, it has only been two years since I had joined the leadership at the agency. However, I have heard that a lot of efforts have been directed towards capturing the Russian markets. To my knowledge, there have been a number of trade fairs to promote our product in Russian markets. I have also been told that there have been efforts in collaboration with the Ethiopian Airlines. But, for so many reasons we were unable to penetrate the Russian markets. Partly, some of the requirements to see our products in the Russian market were found to be quite steep. Mind you this is just my understanding of the issue. However, what we have to understand is that it is not enough for a seller to show interest to expand to other markets. The buyers have to be on board to make it happen. Also, we have to note there is only so much that the agency can do when it comes to successfully diversifying our market destinations. The growers should also be equally enthusiastic; they have to want to sell their products in certain new markets.
This is purely a business decision and the agency can’t intervene and instruct the growers to sell their product at a certain market. The relationship of our growers with their potential customers is quite important. The agency cannot guarantee the grower as to the reliability of certain new markets. Should these markets fail to yield the required foreign exchange that should be repatriated, the agency cannot guarantee the shortfall and the associated consequences for the nation. We do just facilitation work; the rest is up to the grower.
The country has strict regulation as to the repatriation of foreign exchange from the sale of flower or any other commodity. So, the company at the other end (the buyer) should be reliable enough to effect the foreign currency payments on time. For that matter, we had one Russian company (I think it is Top Flower) which had made investments in the flower sector in Ethiopia. And subsequently, this company had started to export to its home market but only to face problems when it came to on-time payments and repatriation of the export proceedings to Ethiopia. We had high hopes for this company in terms of being an eye-opener for the rest of cut flower export sector. But, that did not happen and the company was forced to cease operations. Rather, we think we might have good markets for herbs in Russia.
Some in the cut flower sector bitterly complain as to shortage of land especially when it comes to expansion of the already operational farms. Since the agency is tasked with managing sectoral support, what are you doing to address these concerns?
As you have said, one of our important focuses when offering support to this sector is land. We say that we provide technological support which includes providing support to increase productivity, achieve efficiency and enhance quality. But, this is not enough to increase the overall production levels in the sector. We need to attract more investment to the sector; we need to have new growers going to this business and for that we need to avail adequate farmland. Better yet, we can always wait for new growers to come to the sector: we need to avail land for expansion of the existing farms.
These established firms are better positioned to meet our foreign exchange targets since they are already in more established positions to do so. These firms already have a well-established infrastructure, production facilities and they have familiarized themselves with the localities and the land they are farming. With this resource, they will be successful in a short span of time. If I am not exaggerating, just by availing more land, for instance, by doubling the existing farming holding we can easily achieve a 100 percent expansion in both production and foreign exchange earnings. So, productivity aside, availing more farmland can easily leap the sector. However, the problem is that most of these established firms have occupied farming lands located outside the cities and towns. Now, with increasing urbanization, these farms have little room to expand. So, regional states are challenges to avail this expansion land. As to most of the established flower farms, the ones we can vouch for, have effectively exhausted their allocated land and are stuck because they could not get access to additional land for expansion.
However, due to the nature of the product, which it being a highly perishable item, most of the farms don’t want to relocate, permanently, to other remote locations. They want to be in close proximity to the export outlet. So, what we are doing is trying to find a second alternative corridor like the surrounding of Bahir Dar town in consideration of the airport there. Already we have a few investors coming from Kenya to invest in farms around Bahir Dar; we also have some existing farms which are making the move to the area boldly. In connection with that, the government is working to have Ethiopian airlines to start a flower cargo flight to Bahir Dar. But still, for the flights to start, the minimum load that needs to be lifted from one location has to be met; for that to happen these new growers and the ones making the move to the areas have to start production.
Besides, the government is also working to make the airport ready for the needed cargo flight; and by my estimate this work will wind down after three months. Generally, the approach we are following is diversifying the flower corridors across the nation. We do this by availing new farmlands through rehabilitating the infrastructure such as roads to make the plots more accessible in turn attracting investors. By the way, flower is very high value crop in sense that the foreign exchange earnings per hectare is much higher than some of our traditional agricultural export commodities like coffee.
But, some people question if some flower growers are really using their allocated land solely for the intended purposes. In fact, some even say that these farms produce crops similar to those that the farmers who previously occupied the farmland grew. Do you do follow-ups in this regard?
Yes. In fact, we have done a comprehensive study on 90 growers and we have investigated which of these farms have exhaustively used their plot of land and which have not. We did this in collaboration with the regional authorities especially in the Oromia Regional state. Pursuant to the study we have issued a warning letter to some 25 growers. What we did first is to inquire why these growers have not developed their land thus far.
Cognizant of our responsibilities to facilitate conditions for these growers to fully develop their land, we investigated if they had encountered specific problems which prevented them from developing their land. After identifying this, we have asked each to submit their action plans and took a deeper look at their plans and how we can support them. For example, we found out that some of the growers around Merrti are hobbled by lack of access road. Accordingly we have notified the relevant government agencies and now we have received assurances that the construction of some 11km of road will commence soon. Parallel to the road construction, we are also working to alleviate shortage of electricity and fair usage of irrigation water in the area by linking up the proper governmental agencies. This is like covering our end of the bargain since we have responsibility to support the grower to be successful.
Then we can proceed to taking the necessary measures against those which have not developed the plot of land allocated to them in spite of receiving support from the government. To do that, we will be doing strict follow-ups from now on. However, we have also taken away farmlands from some growers who have completely failed to develop the land they were given; and allotted it to those who are progressing well and need additional land to expand. So, as an approach we prefer to get engaged with the growers and see what is hampering them from developing their lands. You see, after facilitating and offering all the needed support, no grower would be disappointed if the land is taken away for not being able to develop it.
Financial support is also another area that the agency is supposed to work on. In this regard, back in 2008/09, in connection with the global financial crisis, as many as 43 flower farms were in the red; and the Development Bank of Ethiopia (DBE) had to reschedule the loan for many farms and even take over the management of some of the companies. What is the condition of these growers now? Are they out of the woods yet?
Although I was not in my current position at that time, I was told that some 42 flower farms were in financial difficulties that time. And as you have mentioned, the measures that were taken at the time had helped most of these grower to smoothly sail through the crisis period. My information is that most of these growens were able to withstand the problem to go on ever since. As to the farms which were managed by DBE, most of them have since graduated and moved on or were transferred to the third party. I don’t think there are many firms under the management of the bank currently.
As I told you earlier, there are new firms that approached us to get involved in the flower sector, since we have promises with availing new farmland; we approached the bank for farms which are ready to be sold many times. But, I don’t think there was a lot under DBE’s management. Because the demand from the existing flower growers is also quite high since, the expansion of land is not forthcoming; they want to buy farms which have pre-existing farm holdings but there are not many at this moment.
With regard to technological support, you had set up a practical training center at Melkassa some five years ago. But, this facility has not been put to use thus far?
Yes, our practical training center at Melkassa is not active. Last year, we had plans to get this training centre moving, but our budget request was turned down and we were not able to do anything about it. You see, the centre is there but the organization and structure of the center is not suitable for a practical training centre. The construction of the centre as well was not fit to conduct trainings. So, we decided to renovate and reorganize the centre, for which we needed a budget. With regard to technological transfer, we do a lot of work under our integrated capacity building program and part of this effort was to prepare some manuals.
So, we wanted to update these manuals. Especially, these were true for fruits and vegetables. Now, the implementation of this program has hit a roadblock since we were unable to get qualified consultants willing to do the job. It has been two years since we floated an international bid to get the job done. But, thus far we have no takers. So, the only company that is showing interest is the original company which has prepared the manuals in the first place. But, this company does not meet the professional requirement we have for this project.
The thing is that we want professionals to come to Ethiopia and conduct field visits while revising the manuals. But, they could not provide that. So, our attempts were not successful; you see, we want them to observe the production process during one of the two high seasons in a year and gather the information to update them. Thus far, we did not have any luck.
There is one controversial directive in the flower sector. The directive that changed the unit of measurement for cut flower export originating from Ethiopia to kilograms instead of stem. Can you take us through the preliminary justification for this directive?
The very simple justification, of course, is that we could not work with the stem as measurement unit since there is not mechanism to count each and every stem that is exported every day out of Ethiopia. In the past we have left it to the flower growers’ discretion to tell us the actual number of stems that is exported. We have no means of knowing the exact number since we could not and we didn’t count stems at the customs check points. So, if the exporter says that the volume is so and so we had to accept it, we had no choice. As a nation we could not be expected to meet our foreign exchange requirements working with an honesty system; we need to have rules and regulations.
If we say we need to count the stems, then we will be damaging the packaging that is impossible. Thus far, it opens up the door for possible rent-seeking negotiations at our customs check-points. The experience is the same with Kenya. I hear people saying the foreign exchange intake from the sector was much better while we were using stem measurement method. But, I would like to ask how one can say this without having an alternative method of measurement; it is hard to say it was even properly measured previously. So, how can the “before” and the “now” be compared to begin with. I am just applying logic here; how can we say a system which relies on the confession of the exporter is said to be superior to a system that seeks to objectively measure the export levels.
But at the end of the day, cut flower is measured by stem at the international market. And as we know, there is a marked difference in the density and moisture content of flowers produced at different attitudes. Hence, per kilogram the number of stem varies depending on where it is produced (highlands or lowlands). How, can one accommodate this discrepancy?
The estimated price per kilogram is an average price which is derived by taking into consideration the variation in the nature of flowers produced at different altitudes in Ethiopia. By the way, it is net average minimum selling price per kilogram; and it has taken into consideration variation in the flower destiny. If the sellers are found to be fetching prices in great variance to the average minimum price they will be required to repatriate the foreign exchange based on the newly- found information. It is also net selling price which takes into consideration all costs and dues associated with exporting the product.
I think it is compiled based on exhaustive review of sales data and information available. Since then, the original price has been revised once more, which resulted in the increase of minimum price from 3.68 to 3.86 dollars. But, we try to update these prices as much as possible. In general, what I want to point out is what we are insinuating by opposing this directive. We are supposed to go back to the old ways. I wonder if it is practical at all.
The market is serious about quality and standards; so are we saying that we take apart every boxed and packed shipments and count at custom check points every day. Is that possible? I doubt it very much. On the other hand, can we afford to go back to the trust system of the past? Is it appropriate to have such a subjective measurement mechanism at this stage in our economy with all the rent-seeking and good governance issues hanging over us?
But, information regarding the flowers sold on the Dutch auction market is coded and stored by the facilitators. Why cannot we use this original market data to determine the exact price fetched by our flower product?
Yes, previously, it was possible to get the data that you are referring to simply by using a certain password in the system. But, that password stopped working after a awhile. Most companies want to keep their business dealing as confidential as possible; so it is difficult to access actual contractual price quotations. Yet again, it does not mean that all of our cut flower exports are sold at the auction market; we do have growers who are engaged in direct sales. So, even with that, you can’t capture the whole picture.
The best thing we can do is to tighten our follow-up on the market trends and get up-to-date price information. I think we have to be careful when we interpret the market data as well. I think it is one of the most challenging times for the sectors due to the decline of the euro vis-à-vis the dollar. Now, we post our export revenue in dollars while being paid for our export of cut flowers in euros since we mainly sell our product there. So, the sliding euro would definitely hurt our export receipts in dollar terms even when we are doing well in terms of the average price we received for our product. The exchange has a big impact.
Lastly, one of issues which are raised in the cut flower sector is highly skewed ownership distribution in terms of domestic and foreign firms. Both by measure of export earning and land holding, the influence of foreign growers is quite high in Ethiopia. What are you doing to balance this picture?
As a policy we believe that we need to foster local capacity. This is not unique to the flower sector. In any sector, we need to depend on local capacity to ensure sustainable growth. Unfortunately, this sector is a bit tough in terms of technological, capital and market access requirements. So, it is a bit difficult for anybody to join.
In fact, we don’t discriminate between the local and foreign as many local firms who have joined the sector were not able to continue successfully. Apart from the requirement in the form of investment capital, technology and market connections, it also needs a managerial commitment. It cannot be a side-business; it is a full-time job preferably with technical expertise of the managers. Through time, we are seeing a number of local professional emerging as good farm managers learning from the job. I think we need to think about a way of supporting these professionals. What we can do is to offer an equal opportunity to both. But, we do not see many local investors joining the sector although there are a few who are expanding.