Sweet Surrender

Zambia is at it again with efforts to woo investors from Asia.

Last week we noted that a company from India was quite keen to invest in the sugar industry in Zambia. The company is targeting the Nansanga farming block which was created years ago to facilitate the agriculture investments as detailed in the Fifth National Development Plan.

It is true that the big investors already on the ground in the sugar industry may have the muscle to churn out huge stocks of sugar so as to not only satisfy the local market, but to also export to the region. This does not in any way guarantee market dominance when new investors come into the sugar sector with the right quantity, quality, and price.

Studies show that customers are driven by better prices rather than marketing gibberish.

Competition is healthy and works in the best interests of consumers. We have seen how the hospitality sector has developed over the years such that in Lusaka one can find guest house accommodation from as low as K100,000 to a high of K500,000 per night. This phenomenon is driven by wide active competition and the same can be realized for sugar too. Let the competition grow and let the quality improve while prices come down.

This clarion call also goes to Agriculture Minister Peter Daka who has spent some time in Beijing at the China-Africa Agriculture forum where he solicited for investment in the Zambian agriculture sector.

Much of the marketing in agriculture has been to attract investment in food production through framing activities targeted on maize and other cash crops. Food processing is the next logical step in order to preserve the national production. Zambia may have done very well with sugar and maize meal, but the nation needs much more food crops to be processed and packaged to ensure food security throughout the year.

China underlines food security and food availability to her people as a national priority. This top of the agenda priority has been the bedrock on which China then launched the Industrial Revolution that developed the country to become the world’s largest producer of goods within 50 years. Statistics indicate that China tops the world production in poultry, pork, and rice. Interestingly though, is that China processes and consumes all the poultry, pork and rice that she produces in an effort to provide adequate and affordable food to the mass population.

The China experience is a good lesson for Zambia and the region. Zambia can take advantage of her centralized geographical location and grow more food to not only feed the nation, but to export to the region as is evidenced by the vibrant sugar industry.

Opportunities exist for the mass production of ground nuts that can be exported in raw form and as finished products. The range of products includes peanut butter, oil, sweets, roasted nuts, and a host of ground nut food products.

Other crops include Soya Bean, Cashew Nuts, and Cassava. All of these crops can be cultivated on large tracts of land and harvested for processing into various food products and animal feed stocks.

Cassava has the potential of being processed into more than twenty different food products that range from cakes and biscuits, to chips and cereals. Evidence of Cassava products in the daily diet can be seen in Brazil and other South American countries where cassava has been cultivated for hundreds of years.

Zambia is blessed with seasonal fruit crops that include Mangoes, Guavas, and Pineapples. There are options for producing these fruits in large quantities and processing them into either fresh fruit products or dried fruit products for export to the regional markets.

Zambia has grown mangoes for decades if not centuries, and still we note that imports of dried mangoes are coming into the country every day until we are able to process our own fruit to supply our own markets.

It is therefore true to conclude that the regional markets are open for marketing our food products even though many countries in the region may grow some of the fruit and other products produced in Zambia. The determining factors are quantity, quality, and processing capacity. These factors decide whether a country has the capacity to supply itself with food products or if they have to import from another country.

The sugar challenge may be the tip of the agriculture and food processing ice berg. Beneath this discussion lie the many opportunities and options that can unlock potential in the nation to rapidly support economic development as has been the case in China and other South East Asian countries.

What may seem as a trivial challenge to new investors in the sugar sector, could be the catalyst for agricultural expansion and food production at unprecedented levels that would tilt the country profile away from fighting hunger and address the nation to the challenge of economic growth that puts the private sector in the forefront of wealth creation and the opening up of new jobs across the nation.

Keeping the population well fed and healthy is a pre-requisite for economic development. The sugar story should be the flag off for competitive investment in all types of food production. One hopes to see the day when the current big players will throw their hands up in sweet surrender as they lose their dominance of traditional markets. The signs are already there. New players are strategically positioning themselves to take on the dominant heavyweights. Complacency will cost existing companies dearly. Proactive re-positioning will be the best route as the inevitable surge of new competition gears itself to challenge the status quo.

Published 17 August 2010

Manufacturing in 2010

After the recent 15 percent fuel price hike and the subsequent public outcry about the expected impact on travel, transportation, and the prices of goods in the shops, various stakeholders have attempted to justify and support fuel price increases in view of escalating world oil prices.

The government has made public statements in the media, the Energy Regulation Board (ERB) has attempted to convince the public that price increases are inevitable, and some elements of the private sector that are engaged in the energy trade have supported the move since amongst other things, increased energy prices puts more cash into their pockets.

It is not enough for the government to make an official statement supporting the fuel price increase without opening the door for dialogue and discussion. There is a high price to pay for unilateral decisions that impact on the profit margins of the private sector. The price is usually in the form of disinvestment and increased corruption as the stakeholders look for other options to remain in business.

The ERB spends much of its time defending the fuel price increase by elaborately describing the import and processing value chain without attempting to challenge the inefficiencies that if addressed, would keep the price of fuel as low as possible.

Surprisingly, the ERB explanation that Indeni Oil Refinery was designed to process over 1 million tons of oil per year but now only processes around 500 thousand tons, emphasises on the incapacity of Indeni rather than on how Indeni can be upgraded to process at its designed capacity.

The ERB further argues that fuel prices have not been increased for the last 12 months or more, and therefore an increase in January 2010 in not a bad thing. This argument is as lame as telling a mother that since her last baby died 3 years ago she should not be surprised that another one will die this year. The argument should focus on the causes and not on the frequency of the events.

One big hurdle in the energy sector is that the ERB always attempts to speak for the government and justify the government decision rather than to stick to the role of regulator and progressively challenge the value of each player and process in the energy value chain. This has been the case in the price increases for fuel and for electricity. This bias does not do well for Zambia, nor does it help the position for the private sector as a whole.

Cooperating partners and other economists have prodded Zambia to look to the private sector to develop the energy sector through increased investment and the transfer of the energy burden from government to selected private companies.

Without the benefit of a public disclosure of the details of the energy value chain, the public can only conclude that Tazama, Indeni, and the other government owned players endeavour to run their businesses on a cost recovery basis as opposed to a profit making business. This suggests that if these players were privatised, then a profit element would be introduced at each level and the net price of fuel in Zambia would probably double. Where does that leave the country in respect to the cost of manufacturing, farming, mining, and tourism services? Everything will go up in price and Zambia will be reduced to 100 percent import dependent economy relying on mining activities to keep the population fed and clothed.

Our own recent history reveals how Total invested in Indeni, pledged huge amounts of investments to upgrade the operation to efficient production levels, then solicited government to import the nation’s fuel reserves. Fortunately, the government saw the folly of allowing the nation’s fuel processor to also be the country’s major importer of finished fuel. If the government had decided otherwise, then today Total would probably be importing all our fuel needs and Indeni would have gone to grass.

Of course some of our local entrepreneurs have seen the opportunity now that Total is out of the picture. There are huge profits to be made in the energy sector, provided one has the government and the ERB on their side, because it is a monopoly business.

The question is that no matter how much we talk smart about energy, no matter what brilliant economics we discuss on this subject, the fact is that higher costs of energy whether electricity or fuel, will lead to higher costs of production and eventually kill manufacturing, commercial agriculture, mining, and tourism.

There are some realities that we cannot ignore. Zambia is part f the COMESA Customs Union which will operate on zero tariffs amongst member states. Zambia is landlocked and has to offer some competitive and comparative advantages to investors. Zambia has a government whose primary role is to invest tax payer’s money in socio-economic infrastructure that will serve and support the people of Zambia in the long term through the promotion and facilitation of economic activity.

In the past we have seen the government borrow to invest in roads, schools, hospitals, urban water systems, bridges, airports, and telecommunications. The developed infrastructure has been the foundation for our modern and growing economy. Continued development and expansion of these infrastructures will support and facilitate rapid economic and social growth, but only if the infrastructures are cost effective to support competitive production in the regional economy.

Uganda attempted to privatise the distribution wing of the energy sector, and today the failure of that experiment still hurts the lives of many rural Ugandans who have to pay more than double the electricity tariffs that the residents of Kampala are charged.

The writing is on the wall. If we continue to talk meaningless economics and ignore the challenges that threaten our very existence then Zambia can forget about the single digit inflation targets, the GDP growth goal of 8 percent, and the vision of becoming a middle income nation by 2030.

Published 26 January 2010

Milk Production

The Clover group dairy processing company of South Africa has now
decided to invest in Zambia to form a foundation for developing a
regional hub for milk processing and distribution in the sub region.

This new investment in the dairy industry will be welcome because
beyond introducing some healthy competition in the sector, the
consumer will benefit from the variety of new products and possibly, a
higher nutritional content of products on the market.

It is anticipated that the competition amongst three major dairy
product suppliers should bring product prices down although recent
experiences in the mobile telephone service sector suggests that at
least three or four competitors are required to generate enough
competition to see prices come down. Two players in the market
generally lead to cartelling rather than competition.

Zambia has grappled with the dairy industry for decades, and the
farmer has not been able to get a good enough price for milk such that
significantly higher milk production is supported and encouraged.

Clover group may just be the catalyst that creates more demand for
milk from the producers, thereby increasing the producer prices, and
driving the motivation for increased investment in dairy herds and new
entrants into the business.

Zambia is a country that occupies 752,000 square kilometers of land.
Zambia is about ten times the size of Lesotho and offers unimaginable
opportunities for food production to feed the entire sub region.

Investment in most food based industries should be welcomed because
not only does this generate wealth for the nation, but it also
contributes to food security for both the country and the neighbouring
states.
Milk will always be consumed as long as people are around to consume
it. Milk has over the last four decades become a luxury to many
Zambian homes and families simply because of cost, and in many
instances, non availability across the country.

Milk is probably the most nutritious single natural food product that
is available today. Milk nurtures infant children at birth, and milk
can nurture an entire nation if produced and consumed in an affordable
and strategic manner.

The exiting local milk processors must read the writing on the wall
and brace themselves for competition, as a new large investor in the
sector will change the way business is done.

Dairy farmers are challenged to be ready and available to satisfy the
demand for more milk by the processors. Producer prices will no doubt
increase, but the farmers need to be able to supply the demanded
quantities to avoid importation of powdered milk from Australia and
New Zealand as has been the practice.

Government needs to keep a keen eye on the dairy industry and
intervene when necessary to provide extension services and re-stocking
options in order to stimulate and facilitate the development of the
dairy herds across the country.

Many prospective investors will make impressive pledges during
investment discussions, but the acid test is experiencing the pledges
converted into equipment, bricks and mortar, and production.

Clover group may be coming into Zambia initially to package milk, but
they must be engaged to plan for processing in the very near future.
The Zambian dairy farmers need to consider forming cooperatives once
again. Zambia appears to have a capacity side surplus in terms of milk
processing, but there is a definite supply side deficit in respect to
milk production.

Cooperatives ensure that farmers stick to their core business which is
farming. The cooperatives fill in the gaps by setting up milk
collection centres, semi processing the milk if necessary, and
negotiating better producer prices for the benefit of the farmer.

The Netherlands developed the cooperative idea to a fine art, such
that many countries across the world have adopted the model in efforts
to stimulate and encourage milk production.

The competition in the sector may not be initially generated by the
processors, and therefore cooperatives are sometimes challenged to
upgrade their own facilities to include different levels of processing
such that their products have a longer shelf life and can be sold to
the open market if necessary. This competition from the producer level
will generally not be welcome to the large processors and cost
effective pricing and economies and efficiencies of processing scale
start to kick in.

The cooperatives can only go so far in milk processing after which
they have to become fully fledged businesses in themselves. This
business crossover barrier becomes the point at which targeted
processors have better skills, equipment, and know-how to outperform
the cooperatives.

At the end of the day business is business. Companies will try to make
money in the most useful way possible. No single investor will change
the dairy sector overnight. The nation as a whole must invest in
developing the sector starting with Government and the private sector.
The argument for importing milk will always be sound if Zambia does
not significantly produce more milk.

There are several institutions on the ground besides the Ministry of
Agriculture and Cooperatives that can impact on milk production in the
country.

The advent of new investment in the dairy sector may be just the
signal that the Ministry of Agriculture and Cooperatives needed to
lead the charge to promote the cooperative formation across the
country.

Published 18 August 2009

Manufacturing

The 2008 budget targets the private sector as the driving force for economic development in Zambia. In addition, the Fifth National Development Plan focuses Zambia’s economic growth on private sector investments in Agriculture, Mining, Tourism and Manufacturing.

On Friday February 8^th the Zambia Association of Manufacturers (ZAM) answered the Governments call for increased manufacturing by initially, formally launching the ZAM Secretariat in Lusaka.

The Governments of the Netherlands and Finland have extended their support to ZAM with a K1 Billion grant and other resources to assist in the quest to promote increased manufacturing and the creation of both wealth and new jobs.

After the fun and pomp that accompanies an official launch, ZAM will have to get down to do the serious work of dialoguing with the manufacturing companies around the country and come up with proposals to Government on policy development and other facilities that will lead to enhanced manufacturing in the country.

At the launch ZAM highlighted that it will put much effort in skills development to ensure that the manufacturing sector has the necessary human resources to support manufacturing at various levels.

Furthermore, the ZAM President looked to Government to support the manufacturing sector by the provision of incentives and opportunities for value addition in this sector. In addition, ZAM stressed the need for Government to improve the business environment for manufacturers and to attract new investment.

ZAM seeks Tax policies that should aim at strengthening investment in innovation and new technologies. At the support level, ZAM focuses on the need for the Zambia Development Agency, which is the port-of-first call for any investment coming into Zambia, to operate efficiently, expeditiously, and in harmony with other Government agencies so that investments in manufacturing can be promoted and facilitated at all levels.

Finally, ZAM expressed its desire to work with Government in establishing the Lusaka Multi Facility Economic Zone (MFEZ) which is currently being developed by the Japanese Government.

The obvious challenges for the new ZAM President, his Executive and the Secretariat are many and have to be faced head-on in addressing the issues contained in the President’s launch speech.

ZAM will need to be very decisive about what contribution it makes to the National Fiscal Budget each year to address the demands of its membership. ZAM will need to challenge the ZDA on the ambiguities of the ZDA Act which have resulted in some firms closing down and other would-be investments not taking off. ZAM will need to challenge the Government on the rules and regulations that will govern the Economic Zones which are currently cropping up in Lusaka and the Copperbelt without public awareness of the managing mechanisms. In this respect, the role of ZDA in taking charge of the MFEZ’s is a critical factor as ZDA has a division specifically set up for this purpose.

ZAM will be challenged to broaden its coverage by offering its membership and secretariat to the Small and Medium manufacturers which constitute more than 70% of manufacturing activity in Zambia.

ZAM will need to collaborate and co-operate with the many other business associations out there including the Zambia Chamber of Small and Medium Business Associations to spread its outreach across the country.

The impact of regional Free Trade Areas and Customs Unions as deliberated at SADC and COMESA have a direct impact on the future of manufacturing in Zambia. ZAM will find itself grappling with the demands of its membership and the consequences of regional integration on manufacturing. At the global level ZAM will have to participate in debate and dialogue with WTO issues affecting manufacturers in Zambia.

ZAM should look to the Zambia Bureau of Standards and the Zambia Weights and Measures Agency as allies in the manufacturing sector to ensure quality of products manufactured and compliance with package contents as required by law.

The ribbons have been cut, the doors have been opened, the offices are equipped with desks, chairs and computers, and now the serious work of delivering a service to the membership which must grow to national status, is the job at hand.

Welcome new ZAM, welcome new Secretariat, welcome new spirit, welcome new enthusiasm, and welcome new dialogue, debate, and demand for increased manufacturing in Zambia.

Published 19 February 2008

Manufacturing in Zambia

Zambia’s Fifth National Development Plan (FNDP) puts Manufacturing as the 11th chapter amongst other development areas that include Agriculture, Mining and Tourism. This is consistent with the development goals of the Poverty Reduction Strategy Paper which was the development program preceding the FNDP.

The FNDP states that ‘The manufacturing sector is considered to be one of the leading sectors for the revitalization of the economy in the strategy for Zambia’s socio-economic development and poverty reduction.’ The FNDP further highlights that ‘the long term vision of the manufacturing sector in the next 25 years is: A competitive export-led manufacturing sector that contributes 20% to GDP by 2015.’ Some key points in the FNDP and the Commercial, Trade and Industrial Policy in respect to the development of the manufacturing sector are: To review the investment and export processing incentives regime, to raise investments, to create employment and reduce poverty, and to enhance labour and factory productivity by upgrading human resources and technical skills.

The challenge is therefore very clear before us and some strategies need to be defined to achieve the FNDP goals.

One strategy worth considering is to use the ‘Special and Differential Treatment opportunities captured in the World Trade Organization (WTO) rules affecting Least Developed Counties (LDC’s) and the ‘Safeguards’ provisions to support the development of local industries. In this regard the customs duty tariff regime for the import of pre packaged goods versus bulk imported goods can be moulded to provide financial incentives to processors based in Zambia. The tariff difference between pre packed and bulk packed products can offer the local processing or packaging company a 20% or 30% advantage thereby facilitating the development of a strong packaging industry that will be a catalyst for future investments in the more primary manufacturing industries. Zambia has not had as much manufacturing experience as Zimbabwe or South Africa and the packaging industry provides a stepping stone towards developing manufacturing in line with the goals of the FNDP. One simply needs to consider the cooking oil industry to appreciate the impact of this strategy. Within a few years many Zambian will have acquired skills and knowledge in the manufacturing sector and many small and medium scale industries will naturally emerge in our economy. If you simply walk down the isles of any supermarket you will see just how many products can be packaged in Zambia if a packaging program were to be supported. Consider the employment generation this program would facilitate. Consider the skills transfer that would take place. Consider the entrepreneurship opportunities that would be open to all Zambians. Consider the attraction of foreign investment to develop this initiative into integrated manufacturing activities.

The major requirement is for the private sector in partnership with government to formulate some implementation policies that are generic and can be applied uniformly across the manufacturing sector. This initiative will even have the side effect of ensuring that the customs revenues due to the government are meticulously collected at border posts because the private sector in the packaging industry would invest personnel and resources in ensuring that the importers of pre packaged goods pay the correct duties to safeguard their own industries.

In order to realize the potential of the manufacturing industry, Zambia must look at the costs of doing business with a view to facilitating investment in the manufacturing sector. The present powerful kwacha presents challenges for the nation to tackle. The clear advantages of a strong Kwacha are that the consumer has more buying power, imported goods and services become cheaper and the cost of transport and oil based fuels falls. The lower costs of transport and fuels are a plus for local manufacturing and the opportunities for importing new manufacturing equipment and raw material are made cheaper. But on the other hand, a strong Kwacha makes exports out of Zambia more expensive, and for export orientated businesses, the local costs become higher in Forex terms. One would expect that a strong Kwacha is based on improved export earnings, lower inflation rates, and more foreign currency in the market that is demanded by the public. This scenario suggests that borrowing for the manufacturing sector would become cheaper as bank interest rates are expected to fall in line with reduced inflation rates. Unfortunately this is not the case in the Zambian economy. Inflation rates run at 8.4% whilst bank lending rates to the business sector is still pegged at around 25%. The challenge for Zambia is to consider whether the banking industry is a development end in itself, or whether this industry is developed through investments in Manufacturing, Mining, Agriculture, Tourism and other wealth creating activities. It is evident that the banking sector cannot flourish if there is no other economic activity in the economy as banking is a service to the productive sectors of the economy. If this is so, then the challenge is to consider monitoring and regulation mechanisms by the central bank on this sector to focus the benefits of banking and the financial sector on production. The manufacturing sector is currently squeezed by non competitive local and export pricing due to the effects of the strong Kwacha on one side, and by the high cost of money offered by the banking sector which prevents manufacturers from expand their manufacturing capacities to take advantage of the economies of scale in an effort to reduce production costs produce competitive and increased exports. The time for discussions, studies, seminars and workshops is over. Zambia must now act, implement, manufacture and export. Opportunities offered by the African Growth Opportunity Act (AGOA), the Canadian Trade Initiative, the COMESA Free Trade Area (FTA), and the EU-Cottonou Everything But Arms (EBA) facility will remain a pipe dream without our own commitment and investment.

19/07/06 - ZIC Investor Magazine