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Integrating informal actors into the formal dairy industry in Kenya through training and certification


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Presentation by Amos Omore and Derek Baker: Towards Priority Actions for Market Development for African Farmers, AGRA Conference. 13-15 May 2009, Nairobi, Kenya

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Integrating informal actors into the formal dairy industry in Kenya through training and certification

  1. 1. Integrating informal actors into the formal dairy industry in Kenya through training and certification Towards Priority Actions for Market Development for African Farmers. AGRA Conference. 13-15 May 2009, Nairobi, Kenya Amos Omore and Derek Baker, ILRI, Nairobi, Kenya
  2. 2. Outline <ul><li>Role of informal businesses in pro-poor development </li></ul><ul><li>Dairy policy change as a means of addressing poverty: example of Smallholder Dairy Project (SDP) in Kenya </li></ul><ul><li>The training & certification intervention BDS </li></ul><ul><li>Highlights of SPIA-led Policy-oriented research impact assessment (PORIA) of the intervention (Kaitibie et al, 2008) </li></ul><ul><li>Extensions beyond Kenya </li></ul><ul><li>Challenges </li></ul>
  3. 3. Poverty and Agricultural Development <ul><li>Started with UN’s declaration of 1996-2007 as the Decade of Eradication of Poverty </li></ul><ul><li>Quickly followed by PRSP’s as basis for multilateral lending </li></ul><ul><li>Poverty and hunger eradication central in MDGs agreed in 2000 </li></ul><ul><li>Causality from agriculture-led economic growth to poverty reduction has been widely questioned </li></ul><ul><li>2008 World Development Report has evidence </li></ul><ul><li>Few livestock dev projects before MDGs were designed to impact the poor </li></ul><ul><li>Many agencies now look at livestock-mediated poverty alleviation favourably </li></ul>
  4. 4. Role of informal businesses in pro-poor development <ul><li>They dominate production, processing and delivery and employs many </li></ul><ul><li>The majority poor (& many not-so-poor) depend on them </li></ul><ul><li>Policy has historically focussed on their displacement by formal capital intensive production & marketing </li></ul><ul><li>Vested interests often re-enforce their displacement </li></ul><ul><li>Available services have not tailored to them </li></ul><ul><li>Basis for more widespread agro-industrial development has thus been stultified </li></ul>
  5. 5. Integrating informal into formal value chains? <ul><li>Formal </li></ul><ul><li>legal </li></ul><ul><li>richer </li></ul><ul><li>highly capitalized </li></ul><ul><li>highly organized </li></ul><ul><li>well-connected </li></ul><ul><li>higher-priced products </li></ul><ul><li>In dairy : cold chain, pasteurization, packaging </li></ul><ul><li>Informal </li></ul><ul><li>legal status? </li></ul><ul><li>poor, small-scale </li></ul><ul><li>myriad, often part-time </li></ul><ul><li>haphazardly organized </li></ul><ul><li>voice-less </li></ul><ul><li>discouraged / no policy support </li></ul><ul><li>Lower priced products </li></ul><ul><li>In dairy : raw milk sales </li></ul>Informal actors Formal industry How?
  6. 6. The dairy sector in Kenya <ul><li>Predominantly based on smallholder production with and informal milk marketing </li></ul><ul><ul><li>>86% of all marketed milk is sold as raw milk to consumers </li></ul></ul><ul><li>1.8M dairy-cow owning households </li></ul><ul><li>350,000 full time employees </li></ul><ul><li>Majority of all dairy marketing jobs (over 40,000) are in the informal sector </li></ul><ul><li>Poor consumers access affordable milk through informal market, and it is almost invariably boiled before use </li></ul>
  7. 7. Milk channels
  8. 8. Policy environment – pre 2004 <ul><li>Dairy policy based on industrial cold-chain model </li></ul><ul><ul><li>1958 Kenya Dairy Act </li></ul></ul><ul><ul><li>Sales of raw milk effectively criminalized in urban areas </li></ul></ul><ul><li>Kenya Dairy Board (KDB) main regulators </li></ul><ul><ul><li>But does not reflect range of dairy sector stakeholders </li></ul></ul><ul><ul><li>Harassed and arrested informal traders </li></ul></ul><ul><ul><li>Informal traders unlicensed and unable to access training on milk handling </li></ul></ul><ul><ul><li>Perceived concerns about poor milk quality and public health risks </li></ul></ul><ul><li>Powerful private sector actors put pressure on KDB to stamp out informal trade </li></ul>
  9. 9. Smallholder Dairy Project <ul><li>Collaborative research and development project (1997-2004), funded by DFID, implemented by </li></ul><ul><ul><li>Ministry of Livestock and Fisheries Development </li></ul></ul><ul><ul><li>Kenya Agricultural Research Institute </li></ul></ul><ul><ul><li>International Livestock Research Institute </li></ul></ul><ul><li>Objectives: </li></ul><ul><ul><li>Characterise dairy sector and develop appropriate technologies to overcome constraints affecting dairy-related livelihoods </li></ul></ul><ul><ul><li>Influence policy and institutional reform in support of dairy-related livelihoods </li></ul></ul><ul><li>Policy Analysis and Advocacy: </li></ul><ul><ul><li>from 1999 increased emphasis on policy outcomes, with focus on informal milk market issues </li></ul></ul><ul><ul><li>With stakeholders, developed explicit policy advocacy strategy </li></ul></ul><ul><ul><li>DFID assigned full time Junior Professional for policy advocacy </li></ul></ul>
  10. 10. Informal market issues <ul><li>SDP Research showed that: </li></ul><ul><ul><li>Informal markets critical for access for poor producers and consumers </li></ul></ul><ul><ul><li>Important employment: 1.7 full time jobs for every 100l milk handled daily </li></ul></ul><ul><ul><li>High transactions costs due to rent seeking, milk spoilage, confiscation, small scale </li></ul></ul><ul><ul><li>Disincentives for entrepreneurial activity, and for scaling up </li></ul></ul><ul><ul><li>Variable milk quality, although risk assessment showed low risk to human health due to boiling </li></ul></ul><ul><ul><li>Licensing alone not associated with better milk quality </li></ul></ul><ul><ul><li>Training of market agents could improve quality, reduced losses and costs, provide standards </li></ul></ul><ul><li>Evidence implied a different model for dairy marketing policy in Kenya, with a key role for informal sector </li></ul>
  11. 11. Piloting policy-related interventions: Training & Certification using a BDS Approach Milk Traders Training Service Providers (BDS) Regulatory Authority Certification/Licensing Training & certificates of participation in training Accreditation & monitoring Reporting Cess fee Training guides
  12. 12. Policy environment - now <ul><li>Positive engagement by KDB with small-scale milk vendors </li></ul><ul><ul><li>Training and certification, with incentive system </li></ul></ul><ul><ul><li>Subsidiary legislation changed to allow changed approach </li></ul></ul><ul><ul><li>Establishing and accrediting NGO and private business development services (training) to informal sector actors </li></ul></ul><ul><ul><li>KDB field officers: check for licenses; conduct inspection of premises (hygiene and handling); provide advice on how to get licensed; issue movement permits; assist with paperwork on licensing </li></ul></ul><ul><li>KDB has signed East Africa Dairy Regulators Authorities Council (EADRAC), which recognizes and harmonizes approach to SSMVs </li></ul><ul><li>New Dairy Act in parliamentary process </li></ul><ul><ul><li>Explicitly recognises role of SSMVs </li></ul></ul><ul><ul><li>Commits to engaging with informal sector for training and quality improvement </li></ul></ul>
  13. 13. Small Scale Milk Vendors Now <ul><li>Nearly all encountered now licensed, with milk bars (49%) and milk movement (44%) permits most common </li></ul><ul><li>85% now trained on milk handling and quality control </li></ul><ul><li>90% believe it is now easier to obtain licenses than before policy change </li></ul><ul><li>Significant compliance generally allows one to operate, hence unlicensed SSMVs are not so much harassed anymore </li></ul>Source: ILRI/PORIA survey
  14. 14. SDP Advocacy Strategy <ul><ul><ul><li>Elements: </li></ul></ul></ul><ul><ul><ul><li>- Steering committee of key industry stakeholders </li></ul></ul></ul><ul><ul><ul><li>- Partnering with key NGO and other advocacy organisation </li></ul></ul></ul><ul><ul><ul><li>- Regular presentation of evidence at stakeholder meetings </li></ul></ul></ul><ul><ul><ul><li>- Field visits by decision makers </li></ul></ul></ul><ul><ul><ul><li>Pro-active use of public media </li></ul></ul></ul><ul><ul><ul><li>High level Policy Forum </li></ul></ul></ul>
  15. 15. Policy change process Source: Leksmono et al, ODI Working Paper 266, 2006
  16. 16. Simplified representation of policy change process Source: Leksmono et al, ODI Working Paper 266, 2006
  17. 17. <ul><li>Applied impact pathway in an ex-poste analysis </li></ul><ul><li>Used an equilibrium displacement model to evaluate the distribution of gains from policy change (e.g. Freebairn et al . 1982) </li></ul><ul><li>Reduction in transaction costs or market margin drives increased farmgate prices, reduced retail prices, increase in quantity of milk supplied to the market </li></ul><ul><li>Data: surveys of small scale milk market agents and KDB field officials in Aug 2007, and elasticity estimates by Selasya et al, 2006. </li></ul>IA: Method
  18. 18. Changes in milk quantities handled Average daily quantities of milk purchased and sold by SSMVs before and after the policy change.
  19. 19. Estimates of market margins Due to reduced: spoilage, rent-seeking, confiscation Average margin over all locations and trader types, before policy change ; 6.26 Reduction in margin attributed to policy change; 0.54 Average margin over all locations and trader types, after policy change ; 5.72 0.27 0.80 Margin reduction attributed to policy change 6.15 21.96 15.81 5.33 21.93 16.60 Average for all SSMVs After policy change 6.42 20.85 14.42 6.13 21.48 15.35 Average for all SSMVs Before policy change Margin Sale Purchase Margin Sale Purchase Nakuru price (KSh/litre) Nairobi/Thika price (KSh/litre) Type of business
  20. 20. Estimates of welfare benefits 19.53 Annual Benefits minus costs (2005-2039) 0.58 Less annual costs of training and licensing by SSMVs (2005-2039) 0.63 Less annual SDP expenditure (1997-2004) 230 Net Present Value (@5.00%) (to 2039) 12.72 Less annual cess fees (2005-2039) and municipal, council costs 6.09 33.46 Total benefits 0.90 5.09 Benefits to input suppliers 0.75 4.32 Benefits to SSMVs 2.98 16.04 Benefits to producers 1.46 8.01 Benefits to consumers Nairobi area gross benefits (Million US $) Economy-wide (Million US $) Scenario Annual change in benefits (with 2005 as year when benefits start accruing)
  21. 21. Impact Analysis: Distribution of benefits <ul><li>Reduction in margin due to </li></ul><ul><li>reduced spoilage, rent-seeking 10+% </li></ul><ul><li>Annual benefits to Kenya economy </li></ul><ul><ul><li>To consumers: $8M </li></ul></ul><ul><ul><li>To producers: $16M </li></ul></ul><ul><ul><li>To traders: $4M </li></ul></ul><ul><ul><li>To input suppliers: $5M </li></ul></ul><ul><ul><li>Total gains: $33M </li></ul></ul><ul><li>Incremental gain at individual level, but substantial at aggregate level </li></ul>
  22. 22. Beyond Kenya <ul><li>Under a Regional Project on Rationalisation and Harmonisation of Dairy Policies, Regulations and Standards in Eastern and Central Africa (led by ASARECA) </li></ul><ul><ul><li>Standardization of curriculum for training of informal milk traders for 5 countries in EA, harmonized generic training guides for traders and their trainers for 5 countries in EA </li></ul></ul><ul><ul><li>Formation of East Africa Dairy Regulators Authorities Council (EADRAC): MoU agreed in 2006 and Signed in Jul 2007 </li></ul></ul><ul><ul><li>MoU between EADRAC and EAC for wider political support being negotiated. </li></ul></ul><ul><ul><li>The highest Uganda Government officials recently issued a letter to relevant authorities to consider implementing it </li></ul></ul><ul><li>India </li></ul><ul><ul><li>Approach being adapted and piloted in Assam NE India (97% informal market) </li></ul></ul>
  23. 23. Lessons <ul><li>Research evidence must be robust, reliable, relevant to interests </li></ul><ul><ul><li>both socio-economic and technical </li></ul></ul><ul><ul><li>communicated repeatedly, through multiple channels </li></ul></ul><ul><li>Partnerships with credible advocacy voices </li></ul><ul><ul><li>civil society – same agenda but different capacity </li></ul></ul><ul><li>May use the public media </li></ul><ul><li>Support politician’s own agendas </li></ul><ul><li>Ground-level policy implications need to be tested </li></ul><ul><ul><li>Community level research is relevant to national and wider policy </li></ul></ul>
  24. 24. Challenges <ul><li>Improved definition and characterisation of informal sector beyond dairy </li></ul><ul><ul><li>Linkages between informal sector and poverty reduction esp. amongst vulnerable groups in relation to market participation </li></ul></ul><ul><li>Re-examination of Charmes’ (2000) exploratory work on informal sector is timely </li></ul><ul><ul><li>Risk management, sales, employment, emigration orientations, effective use of pro-poor development resources </li></ul></ul><ul><ul><li>Tracking impacts over time, comparing and contrasting formal and informal sector’s persistence, performance and synergy, </li></ul></ul><ul><li>Improved methodologies for analysis of informal value chains </li></ul><ul><li>Means by which formal and informal sectors can co-exist </li></ul><ul><ul><li>Incentives surrounding the efficient functioning of these linkages and their effect on welfare </li></ul></ul>
  25. 25. Thank you Authors: Simeon Kaitibie, Amos Omore, Karl Rich, Beatrice Salasya, Nicholas Hooton, Daniel Mwero and Patti Kristjanson and http//:
  26. 26. Appendix 1. PORIA data sources and methods <ul><li>SDP findings and SDP costs </li></ul><ul><ul><li>SDP reports and files, ODI/ILRI study on SDP learning processes </li></ul></ul><ul><li>SDP outputs </li></ul><ul><ul><li>SDP reports and other outputs </li></ul></ul><ul><li>Policy influence, policy and behavioural changes </li></ul><ul><ul><li>SDP reports and other outputs, interviews with policy makers, regulators and SSMVs </li></ul></ul><ul><li>Economic impacts </li></ul><ul><ul><li>SDP reports; Equilibrium displacement model (see Freebairn, Davis, and Edwards, 1982; Wohlgenant, 1993); NPV </li></ul></ul><ul><li>Attribution of impacts/counterfactual </li></ul><ul><ul><li>Interviews with SDP actors; NPV with SDP compared NPV without SDP </li></ul></ul>
  27. 27. Appendix 2: ODI Study <ul><li>Informal Traders Lock Horns with the Formal Dairy Industry: The role of research in dairy policy shift in Kenya. ODI Working Paper 266, Leksmono et al, 2006 </li></ul><ul><li>RAPID Outcome Assessment (Research and Policy in Development Assessment) </li></ul><ul><ul><li>Tracking back from policy change: Episode Studies of specific policy change </li></ul></ul><ul><ul><li>Tracking forward from research: case study analysis </li></ul></ul><ul><ul><li>Outcome mapping: observing behaviour change among policy-makers and stakeholders </li></ul></ul>
  28. 28. Appendix 3: Values for estimating welfare changes attributed to new dairy policy Study survey, decrease in retail farm price margin (comparing before and after policy change) KSh 0.54/litre Ksh 0.80 Cost reduction due to changes in transaction costs and elimination of NTB Freebairn et al. (1982) 2 2 Elasticity of marketing services supply Salasya et al. (2006) 0.35 0.35 Elasticity of milk supply at farm Salasya et al. (2006) -0.97 -0.97 Elasticity of milk demand at retail Estimated using data from Salasya et al. (2006) and updated SDP milk production data Ksh 7.06/litre Ksh 6.90/liter Non-market input cost per unit of output Study survey (averaged over all locations and SSMV purchases Ksh 15.58/litre Ksh 15.97/liter Farm price Study survey (averaged over all locations and SSMV sales Ksh 21.57/litre Ksh 21.70/liter Retail price SDP, updated (SDP Policy Brief #10, September 2006) 4016 million litres 493 million liters Raw milk production Source of information Value (Kenya-wide) Value (Nairobi area) Variable description
  29. 29. Appendix 4: Counterfactual- NPV with/without SDP Based on NPV with SDP of $230M 62 IRR(%) 174.37 56.07 5 Legalization occurs 20 years later 108 IRR(%) 106.43 124.01 5 Legalization occurs 10 years later NPV (with SDP minus without SDP) (US$ million) NPV without SDP (US$ million) Real interest rate (%) Time delay