Developing a Revival Strategy for Kenya's cotton-textile industry: a value-chain approach
Working Paper No. 8
Abstract
This study was motivated by the huge potential of Kenya’s cotton-textile sector in poverty reduction, its unprecedented decline since the second half of the 1980s and the market opportunities offered by African Growth and Opportunity Act (AGOA) and other trade initiatives. It sought to assess the industry’s operating environment and identify interventions necessary for its revival and sustained development. The Ministry of Agriculture and Rural Development and the Ministry of Trade and Industry collaborated in the project in recognition of the fact that the industry is a chain—starting with cotton production and ending with sale of manufactured garments—in which both ministries are key players. The study applied the business systems approach and the value chain analysis (VCA) frameworks and used both secondary and primary data. Primary data were obtained from sample surveys of all actors in the cotton-textile chain. Stakeholder input, obtained from a series of workshops and conferences, provided interesting insights.
The study finds that cotton farmers are operating with negative gross margins to the tune of Ksh 3/kg of seed cotton produced, largely due to high production costs in an environment of tremendous global decline in lint prices. Major cost drivers are pesticides, lack of extension services and poor infrastructure. The environment in which cotton farmers operate is characterized by general disorder and failure, including the breakdown of regulatory, policy and market frameworks. Locally produced lint is internationally uncompetitive largely because of low capacity utilization, out-of-date equipment unsuitable for smallscale ginning and high electricity costs. Some ginneries have failed completely partly because of their crippling debts. The cotton-textile chain is clogged at the farm and ginning levels: farmers are not responding to supply demands because prices are too low, and ginners are unable to offer better prices because of low seed cotton supplies and inefficiency. Inadequate investment and poor technology are major problems in yarn spinning (and fabric manufacturing to some extent), which leads to high production costs and production of low quality fabrics. The high cost of electricity, high taxes and levies, market limitations associated with unfair competition from imports, and the high cost of borrowing are other important problems. Political and economic uncertainty is also seriously affecting investment decisions, making it difficult to attract the massive investment required in the industry.
Apparel manufacturing is the most vibrant part of the chain at the moment, largely because AGOA permits (until September 2004) imports of fabric from low cost producers in any part of the world. Nevertheless, electricity cost and availability; marketing, especially for non-exporting firms; competition from uncontrolled imports of second-hand clothes, counterfeit textile products and imports that evade duty; and handicaps in obtaining qualified personnel such as managers and designers exist. Governance of the cotton-textile-apparel chain also affects the operating environment. Retailers dominate the chain: they set prices, determine quality and delivery time, and often closely supervise the production of garments right from the development of fabric. Producer prices are therefore low, often below production cost. Lack of capital and its high cost when available are serious obstacles for micro and small garment producers.
Key bottlenecks affecting the whole chain include lack of coordination, institutional and policy failure and lack of competitiveness. Following its liberalization, Kenya’s cotton-textile industry lost its coordinating structures, with serious implications on quality control and performance. Nothing much is for example being done to streamline the lower parts of the chain to respond to the requirements of the post-2004 AGOA era less than two years to the date. Institutional failure is manifested by lack of strong producer associations; weak or ineffective mechanisms for overseeing issues such as production and distribution of quality seed, provision of inputs to producers on credit, and the quality of inputs such as pesticides; and the virtual collapse of extension services. The sector was opened up completely and suddenly after liberalization without offering players time to adjust. The industry lacks policies for personnel or dynamic technology development, a regulatory and legal framework consistent with a liberal environment, and a comprehensive institutional and policy framework covering all aspects of the chain. There is also a glaring absence of strategic positioning policy.
The study recommends temporary financial support to cotton farmers, creation of an apex institution to play coordination and regulatory roles, creation of new and strengthening of existing stakeholder organizations, provision of fiscal and other incentives, temporary restriction of lint and yarn imports to unclog the system, introduction of interventions for cost reduction at all points in the chain, and effective enforcement of standards and regulations to eliminate counterfeit imports and tax evasion.
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