Increasing Urban to Rural Linkages Could Create New Private Sector Opportunities in Rural Ethiopia
By Andrew Larsen | Tue Sep 06 2022
Four persisting problems for Ethiopia's rural ecosystem that Renew Capital believes could turn into opportunities for major growth for and strengthen urban and rural connections for SMEs and households:
Stakeholders agree urban to rural linkages are vital to the future of Ethiopia. However, it was noted that urban to rural linkages are widely disrupted by poor supply chain cohesion and high transportation costs.
Last mile delivery is a significant challenge for both humanitarian organizations and commercial cargo owners. Last mile delivery vehicles in rural areas are not organized into companies, are uninsured, and arbitrarily set rates via verbal agreements with no price transparency. 33% of fruits and vegetables are wasted due to post-harvest loss in Ethiopia.
Ethiopian farmer cooperatives have not been as effective in creating new opportunities for farmers. Whereas, other East African countries, especially Uganda, have robust cooperatives called SACCOS that provide effective services.
Agricultural inputs are imported at a high cost, increasing the vulnerability of farming communities. In 2022, fertilizer costs are set to increase by 150%
To build on the findings of the PSLA, USAID BHA partnered with Renew Capital to conduct a three phase project covering a 12 month period from March 2021 to March 2023. The first phase of the project, which was completed in June 2022, included a market assessment on the current state of Ethiopia’s rural business ecosystem, recommendations for private sector engagement and assistance opportunities that could increase urban to rural linkages. In Phase II of the project, which kicks off in Q3 2022, Renew Capital will test and pilot identified interventions in the field. Phase III will focus on scaling the successful pilots.
Below, Renew Capital has summarized what the project team views as exciting opportunities based on our Phase I market assessment findings regarding Ethiopia’s rural ecosystem.
In conducting market research Renew Capital observed that Ethiopian value chains are largely disrupted due to the high costs for smallholder farmers to transport raw materials along supply chains. This problem highlights synergies between USAID BHA’s two focus areas: urban to rural linkages and trucking, transportation and logistics. We believe that integrative solutions in trucking and transportation will increase urban to rural linkages in the long run. Additionally, by targeting agricultural producing communities in USAID BHA’s identified resiliency and food security activity (RFSA) areas (i.e., Tigray, Oromia, and Amhara) and increasing access to capital through private investment for innovative private sector solutions, existing market linkages could be strengthened, and new market linkages could be built to add value to key economic sectors.
Currently, last mile delivery in Ethiopia, especially in rural areas, is an informalized gig economy. There are approximately 62,000 last mile delivery trucks in Ethiopia, which often belong to single owners, are not members of associations, and often do not have any cargo insurance, increasing risks to commercial cargo owners. Moreover, the trucks are often booked based on verbal agreements, with no formal agreements obligating truckers to show up at the expected pick up time. Finally, there is no clear pricing methodology or itemization of receipts, and no pricing competition which leads to truck owners setting high and arbitrary rates.
Interestingly, throughout East Africa, the private sector is developing solutions for last mile delivery, access to finance, and agricultural input services. For example, Taimba, a company in Kenya, is increasing supply chain cohesion, decreasing post-harvest loss and increasing farmer incomes by reducing the costs for smallholder farmers to sell goods to retailers. According to the company, their tech-based solution cuts out approximately six middlemen that would otherwise be required to connect farm producers directly to retailers. The company reported that by cutting transport costs and increasing the speed at which produce could be sold to retailers, they increased farmer revenues by 45% and reduced post-harvest loss by 60%. Other companies include: Twiga Foods (Kenya), Amitruck (Kenya), and Kobo360 (Nigeria).
Additionally, in Uganda, Savings and Credit Co-Operative Societies (SACCOS) play a strong role in organizing farmers, pooling resources, and providing goods and services to members. This system has laid the foundation for private companies, like Akellobanker and Inputi, to develop market-based solutions for commonly persisting challenges, such as access to finance or the distribution of agricultural inputs. More specifically, Akellobanker has developed a technological tool for credit scoring that has increased access to finance for farmers by leveraging collected financial data, developing credit scores, and selling it to financial institutions as evidence of farmers’ credit worthiness. Similarly, Inputi has developed an online marketplace for the direct sale of agricultural inputs to local distributors. These ideas would also increase access to finance for Ethiopian smallholder farmers, who currently lack access to finance due to their inability to provide significant collateral to financial institutions. However, the current ban on foreign controlled companies providing financial services to Ethiopians prohibits Akellobanker from entering the Ethiopian market in its current state. Despite this, there are opportunities to license the technology to an Ethiopian owned firm to mitigate the impacts of the ban. At the same time, Renew Capital anticipates with moderate confidence that Ethiopia could relax its bans on foreign controlled financial service providers in the near term.
Positively, the Ethiopian government’s investments and commitments to building infrastructure over the next two years indicate that last mile delivery and urban to rural linkages could be strengthened in the near term. The government has already implemented a network of Integrated Agro-Industrial Parks (IAIPs) and Rural Transformation Centers (RTCs), which are intended to provide value added agro-processing services and aggregation sites for raw materials in agro-producing areas. Future investments in urban to rural linkages should build on these existing initiatives and leverage already existing infrastructures. As discussed in our transportation, trucking, and logistics blog [HERE], solutions that integrate existing infrastructure, such as IAIPs, will likely maximize the intended social and/or financial impact of the implemented interventions.
Furthermore, GreenPath, a private agricultural production company in Ethiopia, has successfully leveraged vertical integration to their advantage, utilizing regenerative agricultural principles and EU organic certifications to increase profits in export markets. Vertical integration allows agricultural producers to sell raw materials directly to exporters, bypassing Ethiopia’s Commodity Exchange (which typically sets stable, yet lower prices than international market rates). Vertically integrated crops are typically more profitable overall, as producers can directly access international markets, and thus higher prices. Renew Capital has identified several target crops, which could represent interesting investment cases, job opportunities for women, internal migrants and youth, as well as generate higher incomes for producers. Replicating this model and further utilizing regenerative principles could increase value and revenue as well. For example, implementing additional practices including intercropping, agroforestry, silvo-pasturing, rotational grazing, and planting perennial crops rather than annual crops, can increase revenues, decrease climate change, and increase farm productivity and resilience.
Initial research indicated that avocado, specialty herbs and spice, fruits and vegetables, as well as coffee could be attractive possibilities for these farming practices, and creating stronger linkages between rural producers, agro-processing facilities and export markets. Additionally, the development of sustainable certifications and regenerative farming practices could represent a potential path forward to generate premiums in export markets, as well as increase climate resilience in Ethiopia’s agricultural communities. Because the majority of Ethiopia’s agricultural producers are smallholder farmers owning rights to less than five hectares of land on average, some of these low-volume, high-value specialty crops if grown using regenerative farming methods could provide the greatest opportunity to generate returns at lower costs.
As such, Renew Capital believes that implementing an integrated portfolio of solutions that addresses supply chain challenges, reduces post-harvest loss, builds climate resilience and sustainability, and provides critical services to Ethiopian smallholder farmers could result in stronger urban to rural linkages, increased incomes for smallholder farmers, and lay a strong foundation upon which to build an investment case for local and foreign investors. In summation, Ethiopia’s rural business ecosystem is ripe for optimization. Leveraging emerging technologies being implemented throughout East Africa and strengthening urban to rural market linkages could unlock this potential.
Renew Capital is an Africa-focused impact investment firm that backs innovative companies with high-growth potential. Renew Capital manages investments made on behalf of the Renew Capital Angels, a global network of angel investors, foundations and family offices who seek financial returns and sustainable social impact. For the latest on investing in Africa, subscribe and follow us at our social links below.