IFC FIAS Value Chain Analysis 2007

Moving Toward Competitiveness:
A Value Chain Approach
FIAS: The Foreign Investment Advisory Service

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International Finance Corporation, the Multilateral
Investment Guarantee Agency, and the World Bank
August 2007
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FIAS is a multi-donor service of IFC, the private sector arm of the World Bank Group; the Multilateral Invest-
ment Guarantee Agency; and the World Bank. FIAS advises governments of developing and transitional coun-
tries on how to improve their investment climates for domestic and foreign investors, focusing on four main
areas: investment climate diagnostics, investment laws and promotion, administrative barriers solutions, and
industry competitiveness. Since its establishment in 1987, FIAS has assisted over 130 countries in increasing
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The findings, interpretations, and conclusions expressed here are those of the author and do not necessarily reflect the
views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank Group
does not make any representations or warranties regarding the completeness or accuracy of the information included this
report, or the results which would be achieved by following its recommendations.
Acknowledgments
This technical report was written by a team led by Uma Subramanian with inputs from Michela Paludetto and
Peter Yee. Natalia Cubillos, Matthias Matthijs, Patricia Steele, and Victor Abiola provided very useful inputs at
various stages. The report benefited from extensive comments from several colleagues, including Nigel Twose,
Thomas Davenport, Vincent Palmade, Zoubida Allaoua, Andrew Stone, Hamid Alavi, Simon Bell, Eric Manes,
Asli Demirguc-Kunt, Colin Xu, Leora Klapper, Gabi George Afram, Fernando Montes Negret and Paulo Correa.
Vincent Palmade provided input to Annex 2. Kihoon Lee’s help with data and graphs is greatly appreciated.
iii
Contents
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ix
Chapter 1: Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Purpose and Target Audience . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Chapter 2: Value Chain Analysis—the Key Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Basic Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Source . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Make . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Deliver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Sector Choice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Market Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Value Chain Mapping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Chapter 3: Measuring Performance and Establishing Benchmarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Benchmarking: Uses and Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Cost, Quality, and Supply of Raw and Intermediate Materials . . . . . . . . . . . . . . . . . . . . . . . . . 25
Primary Factor Cost Drivers (Labor, Capital, Land) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Utilities, Administrative Overheads, and Other Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Trade Logistics and Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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vi M O V I N G T O W A R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H
Chapter 4: Developing Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Example: Tourism in Mozambique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Example: Textiles in Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Annexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
1. Acronyms Used in this Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2. Value Chain Analysis: Policy Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
3. Product Value Chain Analysis: Sample Terms of Reference . . . . . . . . . . . . . . . . . . . . . . . . 50
4. Sample Sourcing Business Survey (Peru Textiles) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
5. INCOTERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
6. Industry Competitiveness Indicators for Value Chain Analysis . . . . . . . . . . . . . . . . . . . . . . 62
7. Sample Policy Recommendations & Action Plan Matrix: Mozambique Tourism
High Priority Initiatives) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
List of Figures
Figure 1. Sample Policy Recommendations Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xii
Figure 2. Example of Potential Implementation Projects Following an Industry VCA . . . . . . . 5
Figure 3. Key World Farm Shrimp Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Figure 4. Shrimp Trawling Value Chain for Nigeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 5. Shrimp Value Added and Shipment Value Breakdown . . . . . . . . . . . . . . . . . . . . . . . 7
Figure 6. Extended Value Chain of Cattle Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Figure 7. Key Elements of Value Chain Studies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Figure 8. Value Chain Mapping Activities: Coffee in Honduras . . . . . . . . . . . . . . . . . . . . . . . . . 16
Figure 9. Honduran Coffee Value Chain Dynamics: Structure of Industry . . . . . . . . . . . . . . . 16
Figure 10. Honduran Coffee Cluster: Interaction of Stakeholders . . . . . . . . . . . . . . . . . . . . . . . 17
Figure 11. Factor Productivity Measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Figure 12. Sample Benchmark Indicators for a VCA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Figure 13. A Comparison of the Kenyan and Honduran T-Shirt Value Chains . . . . . . . . . . . . . 25
Figure 14. Time to Complete Import Procedures (Honduras, Kenya, and Spain) . . . . . . . . . . 33
Figure 15. Sample Policy Recommendations Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
List of Tables
Table 1. Unit Labor Cost Comparisons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Table 2. Shuttles Installed in Selected Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Table 3. Electricity Indicators for Selected Countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Table 4. Senior Management Time Dealing with Bureaucracy . . . . . . . . . . . . . . . . . . . . . . . . 30
Table 5. Nigeria: Regulatory Procedures (Economy Wide) . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Table 6. Nigeria: Regulatory Procedures (Specific to the Shrimp Sector) . . . . . . . . . . . . . . . 32
Table 7. Summary Recommendations for the Tourism Sector in Mozambique . . . . . . . . . . . 37
Table 8. Recommendations for the Indonesian Textile Sector . . . . . . . . . . . . . . . . . . . . . . . . 39
CONTENTS vii
List of Boxes
Box 1. Sample Market Analysis Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Box 2. Sample Questions for Buyers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Box 3. Sample Questions for a Mapping Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Box 4. Cost and Time Measurements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Box 5. Methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Box 6. Shipment Value Metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Box 7. Sample Questions for Establishing Benchmarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Box 8. Questions to Consider When Assessing Cost, Quality, and Supply of Materials . . . 26
Box 9. Questions related to Factors of Production . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Box 10. Factoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Box 11. Questions to Consider When Assessing Administrative Costs . . . . . . . . . . . . . . . . . . 30
Box 12. Questions to Consider When Assessing Trade Logistics . . . . . . . . . . . . . . . . . . . . . . 34
vii
Executive Summary
Developing countries face tremendous opportunities prise Survey series, Investment Climate Assessment
for economic growth given economic liberalization reports (ICAs) and FIAS’1 regulatory reform and in-
worldwide, and rapid advancement and application vestment generation products—all of which address
of information and communications technologies. public policy issues that constrain the overall busi-
However, along with the many opportunities global ness environment. The industry-specific value chain
network trade has to offer, firms in developing coun- approach presented in this report complements
tries also face strong competitive pressures for greater these products. In addition to the economy-wide
efficiency and productivity to maintain market share business environment issues addressed by many of
or even survive. A strong business environment based these products, the value chain approach uncovers
on sound institutions and policies is a necessary sector-specific constraints, offering yet another “lens”
basis for enhanced competitiveness of private firms through which the underlying public policy issues can
that produce and deliver goods and services. When be addressed.
business environment constraints—inefficiencies
and cost disadvantages—can be identified, policy
makers have the opportunity to jumpstart economic What is value chain analysis?
reform processes that target priority areas along the
product/service life cycle known as the value chain. Value chain analysis (VCA)2 is a method for account-
This technical report outlines a pragmatic approach ing and presenting the value that is created in a
for analyzing value chain performance as the basis for product or service as it is transformed from raw in-
identifying binding constraints to growth and com- puts to a final product consumed by end users. VCA
petitiveness. This approach is intended to facilitate
formulating a targeted reform agenda. 1. The Foreign Investment Advisory Service (FIAS) is a multi-
The World Bank Group (WBG) uses a myriad of donor advisory service of the World Bank Group, jointly sup-
policy tools to support its ongoing private sector ported by the International Finance Corporation (IFC), the World
Bank, and the Multilateral Investment Guarantee Agency (MIGA).
development work. There are many established prod- 2. In this report, VCA is used to mean either “value chain
ucts—including the Doing Business reports, Enter- analysis” or “value chain approach.”
ix
x M O V I N G T O W A R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H
typically involves identifying and mapping the rela- • Market related issues (e.g., market diversification,
tionships of four types of features: (i) the activities research and development, product diversifica-
performed during each stage of processing; (ii) the tion, supplier linkages).
value of inputs, processing time, outputs and value-
added; (iii) the spatial relationships, such as distance
and logistics, of the activities; and, (iv) the structure Purpose and target audience of this
of economic agents, such as suppliers, the producer, publication
and the wholesaler. Value chains can become com-
plex when they reflect multi-stage production systems This technical report offers a rationale and a practi-
with multiple types of firms operating in different local approach for using VCA as an empirical tool in
cations in one country or multiple countries around identifying binding constraints to industry growth and
the world. competitiveness. While this publication is not a “how-
The industry value chain approach introduced in to” manual per se, it aims to present a sound analyt-
this technical report relies on the traditional market- ical framework, pointing to useful insights on how to
related context of value chain analysis in identifying infer business environment-related policy issues. It
failures in sourcing, manufacturing, and delivery. 3 Yet outlines the key elements of value chain studies and
this approach is unique in recognizing the key pub- discusses methodological issues in delivering results
lic policy, institutional and infrastructure factors un- that can be reliably compared across studies and
derlying constraints in the business environment. that can provide a basis for the development of poli-
For instance, regulations related to trade, taxes, licens- cies and institutions. Thus, the approach and case his-
ing and standards often significantly impact firm tories presented here are intended to contribute to
competitiveness. The emphasis on these types of ongoing discussions on good practices in VCA within
factors and their impacts on an industry’s market- and outside the World Bank Group.
based value chain not only helps in pinpointing The VCA methodology highlights the linkages be-
priority areas for reform in an industry-specific tween public policies and the performance of in-
context, but also in designing policy solutions within dustries (or firms), and therefore it is an appropri-
the environment in which firms operate. ate tool for a broad audience in both the public and
The policy and reform agenda that typically private sectors. It is aimed at practitioners who con-
emerges from the value chain approach presented duct VCA with a view to getting at policy and insti-
here relates to three core areas: tutional issues affecting industries. It may also be use-
ful to private sector groups in WBG client countries
• Product market issues (e.g., trade policy, compe- as they strive to improve their sectors’ competitive-
tition policy, price distortions, subsidies, licensing, ness. The data-based reform agenda enables private
product standards, customs, logistics, property sector stakeholders—firms, trade associations, and
rights, enforcement of regulations); business advocacy groups—to advocate for reforms
• Factor market issues (e.g., wages, capital charges, that address priority economy-wide and sector-
utility market issues, labor market rigidities, land specific issues as identified in the VCA.
price, zoning);
3. In addition to WBG units, many other international devel-

The stages of VCA
opment agencies such as GTZ, USAID, COMMARK, and ILO, also
use value chain approaches. Industry value chain analyses con- The three integral stages of the VCA presented in this
ducted by GTZ, USAID and the World Bank Group’s Value Addi- report include:
tion to Firms business line have primarily focused on “market fail-
ures.” The main objective of these projects has been to help
producers ramp up global value chains, create markets and • Process mapping of industry chains in qualitative
strengthen backward linkages. (graphical) terms and quantitative terms by disag-
EXECUTIVE SUMMARY xi
gregating metrics such as cost, time, productivity, and job productivity. As shown in Figure 1 below, the
and value addition along the various segments of VCA framework identifies a priority set of issues,
each chain. The qualitative mapping presents all some of which are sector specific while others apply
activities, actors, relationships among segments of to the entire economy and affect many sectors and
the chain and interaction between the various firms in a country. Also, some issues typically need
stakeholders, including producers, intermediaries to be addressed primarily by the public sector while
and buyers. others are driven mainly by the private sector.4
• Establishing benchmarks for performance indica-
tors against international competition and best
practices. The performance measures together Case studies in VCA and related policy
with benchmarking against comparators helps in: recommendations
! Assessing the relative importance of the differ-
ent issues that affect the performance of the The case studies of the shrimp industry in Nigeria and
value chain, and; tourism in Mozambique help to illustrate the basic
! Prioritizing the most binding constraints that concept and application of VCA. The Nigerian shrimp
directly affect the competitiveness of an industry was a promising sector in terms of growth
industry. potential, job creation and future export earnings,5
• Explicitly understanding the policy and institu- that had displayed a turnaround from a serious de-
tional factors underlying these performance mea- cline apparent a decade ago. It was one of four indus-
sures. This helps in developing a targeted reform tries in Nigeria chosen for VCA by the WBG project
agenda that, if addressed, will enhance growth group across a continuum of performance (declin-
and competitiveness of the subject industries, and ing, nascent, recovering, and successful rebirth) de-
will potentially attract private investments, en- signed to bring to light most of the policy issues af-
abling higher value job creation. fecting the country’s non-oil sectors.
In Mozambique, the VCA of the tourism industry
An important preparatory step for the VCA in- was part of a larger effort to diversify the economy
cludes sector choice which is to determine the actual and help sustain an average 8 percent annual growth
sector(s) that will be analyzed, and more specifically, rate following the country’s dramatic post-conflict re-
the product focus based on criteria such as contri- covery. The Mozambique study analyzed both the mi-
bution to the gross domestic product (GDP), export croeconomic and structural dimensions of the
earnings, attractiveness for private investment, pol- tourism sector to pinpoint the factors constraining
icy relevance, job creation, local value added, and so product and factor markets, as well as the delivery of
on. Another important element (market analysis) is services in meeting the changing needs of tourists
to provide a solid basis for understanding industry visiting Mozambique.
trends and issues both within the country and in
the international arena. Nigeria’s shrimp industry. Nigerian shrimp sup-
pliers to the European Union (E.U.) market are rep-
resented by a trawling industry of about 20 compa-
Formulating policy and programs from value nies which annually export about US$55 million in
chain analysis frozen shrimp to the E.U. Frozen wild shrimp from
The findings of previous value chain studies have pro- 4. Both the public and private sector must work closely to-
vided the strategic underpinnings for growth and gether on several of these issues if they are to be addressed ef-
fectively. However, to emphasize the primary responsibility, issues
competitiveness strategies, small and medium-sized
are divided between the public and private sector in Figure 1.
enterprise (SME) projects, and technical assistance 5. USAID, Industry Action Plan for Nigerian Shrimp and Prawns,
projects to help strengthen business environments 2002.
xii M O V I N G T O W A R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H
Figure 1 Sample Policy Recommendations Framework
Public Sector Private Sector
• Reduce VAT Redemption delays • Private power provision to rationalize cost and/or
enhance performance
Economy Wide
• Risk-based system for profiling tax payers, backed

by an effective post-refund audit system • Private water and sanitation
• Review and/or revise Investment Code to ensure • Privatize air/sea ports
level playing field between SME and large firms
• Improve land registries; clarify titling/leasing or user
rights
• Remove tariff distortions on main imported inputs • Shop floor management enhancements to increase
for the sector productivity
Industry Specific
• Reduce barriers to Import Licenses for key actors in • Diversification of products and/or markets;
the sector
• Improve capacity of suppliers, infrastructure for
• Improve enforcement of product standards sourcing to improve backward linkages
• Policy for attracting FDI (e.g., hotels) • Promotion for attracting FDI in for e.g. hotels, tourism
products
Source: Uma Subramanian (2007).
A useful framework for developing a targeted reform agenda categorizes sample recommendations derived from the industry VCA into a matrix. Recom-
mendations are grouped along one axis according to whether they apply economy-wide or by industry; along the other axis, solutions that are primarily
addressed by public sector agencies are separated from those handled by private firms.
Nigeria are purchased by large European wholesalers logistics. The major factors that contributed to the
on a “free on board” (FOB) basis at the port of Lagos “turnaround” of Nigeria’s shrimp sector: the high-
and then enter the E.U. under the preferential quota- value nature of the product; increasing demand in the
free and tariff-free access offered by the Cotonou E.U.; and the quality of the product, which meets
Agreement. A cold chain keeps the shrimp frozen international quality standards.
throughout the supply chain from trawling to final The growth in demand for shrimp and the Niger-
delivery, a procedure that meets critical E.U. Hazard ian industry’s relatively straightforward value chain al-
Analysis and Critical Control Points (HACCP) stan- lowed for integration of the industry’s production into
dards for market entry. the global value chain. By incorporating HACCP qual-
The VCA identified four key cost drivers: (i) fuel, ity and production standards into their operations,
used for vessel operation and the critical cooling Nigerian shrimp producers effectively accessed high-
chain, which accounted for 32 percent of the ship- end European markets willing to pay premium prices
ment value; (ii) administrative overhead costs, 12 for high-quality goods. It is hard to imagine that the
percent; (iii) capital charge, 10 percent; and (iv) lo- industry would have been able to reverse its decline
gistics, 5 percent. Despite the high cost elements, the without E.U. market access. In this regard, the Niger-
value added component of the shrimp chain gener- ian government was influential in fostering growth in
ated a profit rate of 18 percent of the value added after its shrimp industry through effective policy implemen-
covering the costs of both the primary inputs and the tation to acquire the HACCP certificate.
EXECUTIVE SUMMARY xiii
Mozambique’s tourism industry. Tourism in tional distribution networks, and a thin product line
Mozambique is growing at a 13 percent annual rate dispersed across locations. More generally, a conflu-
as Africa captures an increasing share of the global ence of investment climate issues is preventing dy-
tourism market. Yet this growth rate is from a very namic development of the industry; the weak in-
low base level in Mozambique. Mozambique attracts vestment climate increases costs for finance and
relatively fewer tourists, particularly intercontinental inputs, drains resources from the private sector, and
visitors, who spend less than in other destinations in creates an uneven playing field and entry barriers for
Africa and other world regions. innovative entrepreneurship.
The tourism value chain in Mozambique required As a result of the VCA, targeted policy recommen-
an assessment of each value chain component, such dations were developed to address four key areas of
as air carriers, hotels, restaurants and tours, in the industry constraints: (i) the ease and costs of access
overall tourism experience, in addition to the link- to destinations in Mozambique, which included visas
ages to other agents, and the performance of the ser- and frontier issues, airline connections and services
vice providers, industries and institutions. The study in addition to infrastructure, and ground transporta-
focused on three typical trip itineraries6 chosen to re- tion; (ii) regulatory and administrative constraints in
flect the heterogeneity of tourism products, destina- the business environment associated with land user
tions and market segments that characterizes Mozam- rights, licensing, business start ups, investment codes
bique’s tourism offer. all of which hampered investments in hotels, resorts
Although the VCA validated Mozambique’s valu- and alternative tourism accommodations; (iii) tourism
able intrinsic assets and strong comparative advan- institutions and stakeholder cooperation in effec-
tage in tourism, it also found the industry is con- tively developing, maintaining and marketing tourism
strained by poor accessibility and positioning in the resources; and (iv) linkages, leakages and increasing
international marketplace, absence from the interna- value added, in order to capitalize on the tourism in-
dustry’s inherent forward and backward linkages
that spill over into other sectors. (See Annex 7: Sam-
6. Lisbon–Maputo–Vilanculos/Bazaruto (Southern Leisure Mar-
ket); London–Johannesburg–Pemba–Quirimbas (Northern Up- ple Policy Recommendations & Action Plan Matrix:
scale Market); and, Europe/USA–Maputo (Business/Conference). Mozambique Tourism High Priority Initiatives.)
Introduction
1
Context
Developing countries face tremendous opportunities The World Bank Group uses a myriad of policy tools
for economic growth given the increasing conver- and approaches to support its ongoing private sec-
gence of economic policies, and advancement and tor development work—including the Doing Business
widespread application of information and commu- reports, Enterprise Survey series, Investment Cli-
nications technologies. A growing number of coun- mate Assessment reports, and FIAS’ regulatory reform
tries are producing and delivering products and ser- and investment generation products—all of which ad-
vices in today’s global environment of unprecedented dress public policy issues that constrain the overall
decentralization. However, along with the many op- business environment. The industry-specific value
portunities global network trade has to offer, coun- chain approach (VCA)3 presented in this report com-
tries and firms also face strong competitive pres- plements these products. In addition to economy-
sures for greater efficiency and productivity to wide investment climate issues, VCA uncovers sector-
maintain their market share or even to survive. There specific constraints, thus offering yet another lens
is a growing consensus in the development com- through which to identify and understand the under-
munity that sound institutions and policies that en- lying public policy issues. These sector-specific is-
hance a country’s investment climate are often de- sues are often important in jumpstarting more com-
cisive to the countries and firms that face this global prehensive economic reform processes in client
challenge.1 countries.
The World Bank Group’s “private sector develop- By analyzing the costs of doing business through
ment strategy” has underscored several microeco- a specific product or industry lens, VCA facilitates
nomic issues relating to both product and factor the identification of binding constraints to growth
markets as critical elements to the successful devel-
opment of these public policies and institutions.2 2. World Bank, Private Sector Development Strategy: Imple-
mentation Progress Report (June 2003).
3. This report uses VCA to abbreviate “value chain analysis” and
1. See, for example, Klein and Hadjimichael (2003). “value chain approach.”
1
2 M O V I N G T O W A R D C O M P E T I T I V E N E S S : A VA L U E C H A I N A P P R O A C H
and competitiveness4 and the effective targeting of in- VCAs are integrated with other analyses as part of
stitutional and policy-related issues, at the sector and larger integrated studies (e.g., sources of growth
economy-wide levels alike. The reform agenda that studies, growth and competitiveness strategies, and
typically emerges from the VCA presented here relates ICAs). For example, VCA was integral to the ICA re-
to three core areas: port in Cambodia and provided important inputs to
the World Bank’s growth and competitiveness strate-
• Product market issues (e.g., trade policy, compe- gies in Bangladesh, Kenya, and Pakistan.
tition policy, price distortions, subsidies, licens- Value chain analyses are a good way to under-
ing, product standards, customs, logistics, property stand relationships and linkages among buyers, sup-
rights, enforcement of regulations) pliers, and a range of market actors in between. For
• Factor market issues (e.g., wages, capital charges, example, a coffee value chain links coffee producers
utility market issues, labor market rigidities, land to processors and multinational buyers at one end of
price, zoning) the chain, and to suppliers of inputs (such as fertil-
• Market-related issues (e.g., market diversification, izer producers) at the other end. Many VCAs also in-
research and development, product diversifica- corporate the role of transportation, utility, and finan-
tion, supplier linkages). cial service providers, among others. However, the
focus on inter- and intra-industry and firm relation-
VCA plays an increasingly useful role in the World ships—although extremely useful in its own right—
Bank Group’s work to improve the investment cli- captures mainly market-related insights and often
mate. A number of groups and units within the World misses the policy and regulatory environment (e.g.,
Bank Group are already engaged in value chain stud- taxes, licensing, standards, etc.) in which private
ies in various countries and regions of the world, in- firms operate. Policies and regulations often have a
cluding Africa, Latin America, Central Asia, South significant effect on firm-level competitiveness and the
Asia, East Asia, and the Middle East and North Africa. performance of the chain. By explicitly synthesizing
FIAS itself is directly involved with several value chain government policy issues with market relationships,
studies in a number of countries.5 the type of value chain analysis presented in this re-
Value chain analyses are sometimes “stand-alone” port helps to clarify which binding constraints to
studies that provide direct inputs to government growth and competitiveness are affecting the firms
strategies. In Indonesia, the value chain analyses of that comprise the industry.
selected sectors were key inputs for the govern- This integration of the public policy environment
ment’s export competitiveness strategy.6 Sometimes with market relationships makes this approach differ-
ent from VCA undertaken by other agencies, such as
4. Value chains are generally used to assess the competitive-
ness of firms within an industry. The value chain analysis ap- Germany’s Gesellschaft für Technische Zusamme-
proach presented in this report focuses on industry competitive- narbeit (GTZ) and the U.S. Agency for International
ness, as evidenced by the aggregate ability of firms within an Development (USAID). Their primary focus is on ad-
industry to compete in their markets. Underlying measures of in-
dustry competitiveness include productivity, costs, growth in ex-
dressing market failures, often with the objective of
ports, market share, and growth in profits. At the individual firm helping small and medium-sized producers create
level, competitiveness is demonstrated in profitability and in- markets, strengthen links with global buyers, and
creased market share. There are other definitions for competitive-
better integrate with global value chains.7
ness that do not apply in this case. For instance, VCA does not ex-
amine how well a country’s economy is performing compared to
other economies, as embodied in the standard of living and 7. In addition to World Bank Group units, many other inter-
changes in national productivity. national development agencies such as GTZ, USAID, the ComMark
5. FIAS (Foreign Investment Advisory Services) is a joint advi- Trust, International Labour Organization, and others also use
sory service of the World Bank and the International Finance Cor- value chain approaches. Among academics, Michael Porter (1985)
poration. FIAS has applied the value chain methodology to agribusi- and Gary Gereffi (1994) in particular have pioneered approaches
ness and manufacturing and, more recently, also to the tourism to VCA. Porter focused on how individual firms can create value
sector. and build up their competitive advantage; Gereffi focused prima-
6. FIAS (2006b). rily on the economic governance patterns in “global” value chains.
CHAPTER 1. INTRODUCTION 3
The three integral stages of the VCA presented in quantitative indicators for typical value chain studies,
this report include: thus allowing for cross-country comparisons. De-
spite differences in the types of sectors and products
• Process mapping of industry chains in both qual- analyzed, relevant indicators (such as input prices, fac-
itative (graphically) and quantitative terms by distor costs, logistics time and costs among others) can
aggregating metrics such as cost, time, productiv- be computed and compared.
ity, and value addition along the various segments By linking public policies and the performance of
of each chain. industries (or firms), the value chain approach is rel-
• Establishing benchmarks for performance indica- evant for a broad audience in the public sector, pri-
tors against international competition and best vate sector, and international development agencies.
practices. This process helps in:
! Assessing the relative importance of the differ- The Public Sector
ent issues that affect the performance of the
value chain, and; Because the primary clients for the WBG’s business-
! Prioritizing the most binding constraints that di- enabling environment work are governments of de-
rectly affect the competitiveness of an industry. veloping countries, the regulatory and public policy
• Explicitly understanding the policy and institu- focus of this value chain approach is relevant in pro-
tional factors underlying these performance mea- viding a specific policy reform agenda in addition to
sures; this facilitates the development of a tar- the more traditional market-related agenda of most
geted reform agenda for the public and private other industry value chain studies. This approach
sectors to address the binding constraints. shows public sector agencies the effects of certain
policies that directly and indirectly affect private sec-
tor competitiveness and growth.
Purpose and Target Audience For example, a few years ago, the Nigerian govern-
ment introduced an export subsidy to promote non-
Moving Toward Competitiveness: A Value Chain Ap- oil exports. A VCA of the cotton textile industry
proach offers a rationale and a practical approach for showed the unintended effect of the export subsidy
using VCA as an empirical tool in identifying binding on other parts of the value chain. Because cotton
constraints to industry growth and competitiveness. growers were exporting cotton on an accelerated
While this publication is not a “how-to” manual per basis to take advantage of the export incentive, the
se, it aims to present a sound analytical framework Nigerian textile industry experienced a significant
by pointing to useful insights on how to infer busi- shortage of raw material which forced them to im-
ness environment-related policy issues. It outlines the port higher-priced cotton, thereby significantly in-
key elements of value chain studies and discusses creasing their production costs.9 The distortionary
methodological issues in delivering results that can effect of the export subsidy on different segments of
be reliably compared across studies and that can the textile chain was among the key issues that af-
provide a basis for the development of a reform fected the sector’s survival.
agenda.8 Thus, the approach and case histories pre- The Kenyan cut flower industry offers another in-
sented here are intended to contribute to ongoing teresting example. Even though nearly all cut flow-
discussions on good practices in VCA within and ers in Kenya were produced for export purposes,
outside the World Bank Group. Although the ap- farmers were still required to pay a value-added tax
proach presented here does not entail a standardized (VAT) up front for imported inputs, and to claim re-
set of survey questions, it identifies a minimal set of imbursement afterward. In practice, many small and
medium-sized flower producers (often facing a
8. The report is not designed to guide task managers in elab-
orate detail on how to conduct a value chain project, nor to ad-
vise policy makers on “which sectors to choose.” 9. Yee and Paludetto (2005).
chronic lack of working capital), had to wait up to market structures and reward mechanisms.13 Armed
12 months to receive their refunds. This impeded with this knowledge, an individual firm can determine
their ability to invest in expanding capacity and stay- how well it is meeting end-market requirements,
ing current with new technology.10 what improvements may be needed, and how it can
In Indonesia, one of the major findings of the maximize its returns within the chain structure.
shrimp value chain study was that the lack of effec-
tive enforcement of standards by government agen- International Development Agencies
cies hurt the industry’s growth potential and credi-
bility in key international markets.11 Applying a VCA—a commonly used tool in private
business—to public policy objectives enables devel-
The Private Sector opment agencies to:
The data-based reform agenda enables private sec- • Catalyze the momentum for policy and institu-
tor stakeholders—firms, trade associations, and busi- tional reform by creating a “bottom-up” policy
ness advocacy groups—to advocate for reforms to ad- agenda that incorporates a sector perspective;
dress priority economy-wide and sector-specific issues • Provide an effective platform for data-based public-
as identified in the VCA. private dialogue and partnership;
For example, a value chain study on textiles in In- • Enable the spread of technological know-how
donesia12 showed the negative effect that a 10 per- through stronger linkages among private firms
cent VAT had on the competitiveness of the entire tex- with regional and global supply chains;
tile industry. The delays alone in VAT restitution for • Examine the allocation of value added across the
imported cotton implied an extra cost equivalent of chain, which has implications for job creation and
9–14 percent of the total profit of an average textile higher wage employment, and ultimately for
firm. This information gave the textile industry fur- poverty reduction.
ther support that helped them make the case for a
complete elimination of VAT on cotton imports, a re- One of the most significant outcomes of previous
form which was subsequently passed. It is important VCA projects was that they brought together produc-
to note that the VAT issue in the textile industry also ers, intermediaries, government agencies, and other
underlines the cost of doing business for other pri- relevant stakeholders in different segments of a value
vate industries in Indonesia. chain. The findings of the VCA enabled these play-
As a tool used in business operations, the value ers to jointly seek solutions to overcome key im-
chain mapping exercise helps a firm to determine pediments that affected the performance of the
which stakeholders are involved in the chain, and how chain. For example, high import tariffs on fertilizers
and where they affect the production and distribu- increase the production costs of cotton growers. A
tion, revealing opportunities to forge new or better VCA can help assess these tariffs on the production
relationships that can influence the firm’s level of costs of cotton growers and trace their effect on the
success in the chain. For firms trying to access inter- competitiveness of a downstream, higher-value indus-
national markets, when each firm is only a small try such as yarn spinning or cotton shirt produc-
part of the total value chain, a VCA provides information. This kind of understanding is enhanced by both
tion on the overall chain structure and the relation- the quantitative and qualitative data generated by a
ship between the firms in the chain, including end- VCA and will considerably strengthen reform advo-
cacy efforts.
The findings of previous VCAs have provided the
10. World Bank Group (2005c), Kenya: Growth and Com-
petitiveness.
strategic underpinnings for growth and competitive-
11. FIAS (2006b).
12. FIAS (2006b). 13. Gereffi (1994).
Figure 2 Example of Potential Implementation Projects following

an Industry VCA
ADVISORY AND INVESTMENT PROJECTS
• Industry Specific Licensing • Trade Policy (tariffs, agreements)

• Product Quality Standards • Infrastructure
• Taxes • Labor Policy
• Trade Logistics • Innovation
• Corporate Social Responsibility • Governance
• Foreign Direct Investment Promotion • Land Policy
• Competition Policy • Linkages
• Investment Law • Firm level / Business Associations
• Land Administrative Barriers Capacity Building
ness strategies, and for projects designed to improve Figure 2 depicts the range of potential downstream
the business environment for small and medium- implementation projects enabled by the results of a
sized enterprises.14 In Kenya,15 for example, the find- VCA; some are of a technical advisory nature, while
ings of a value chain study provided the basis for a proj- others may be direct investment projects.
ect that was designed to increase productivity and
employment in small and medium-sized enterprises
by strengthening financial and non-financial markets. Example: The Shrimp Value Chain in Nigeria
The set of activities implemented to support enter-
prise needs included a value chain–based, subsector- The basic concept of value chain analysis is illus-
matching grant fund, tools for business schools to trated by examining the shrimp value chain in Nige-
improve management training, a business plan com- ria. In order to uncover priority policy issues affect-
petition to promote innovation and entrepreneurship, ing the non-oil sectors in Nigeria, the WBG project
and a restructuring of the national levy scheme to en- team, in close consultation with the government,
sure sustainability of firm-level training. The project decided to apply VCA to a combination of booming
was also designed to reduce compliance costs in busi- as well as declining industries. The industries se-
ness regulations, and to create incentives for informal lected were: textiles (declining), cassava (nascent),
firms to graduate to higher levels of formality. The proj- leather (recovering) and shrimp (successful rebirth).
ect assisted in implementing a simplified taxation Nigeria’s shrimp exports enter the European
regime and in reducing the cost of starting up busi- Union under the Cotonou Agreement (successor to
nesses through the adoption of a “one-stop shop.”16 the Lomé Agreement), which offers preferential
quota-free and tariff-free access to the EU to various
14. In Honduras, Mozambique, Nicaragua, and Nigeria, key countries in Africa, the Caribbean, and the Pacific.
findings have been integrated with World Bank Group projects. Nigeria’s shrimp are purchased by large wholesalers
15. World Bank Group (2005c), “Kenya: Growth and Com-
in the EU in a market dominated by seafood compa-
petitiveness.”
16. World Bank Group (2004b), “Kenya: Micro, Small and nies from the Netherlands (Figure 3). These whole-
Medium Enterprise Competitiveness Project.” salers purchase frozen wild shrimp from Nigerian
Figure 3 Key World Farm Shrimp Suppliers to the catch as a preservative; and nets, winches, and
wires that are needed to support maintenance. The
Other
materials are purchased abroad and brought in by con-
8%
USA tainers that have to pass through cross-border formal-
4%
Belgium ities in Lagos Port (Figure 4).
France
5% 37% Trawlers have a freezer and a cold store that main-
tains the temperature around –20°C, which is the
start of the cooling chain as the catch is processed and
Spain
10% frozen at sea. The typical trawler is built abroad and
is about 25 meters long with a capacity of 40 tons. With
a crew of about 15 people, each trawler is able to make
about five to six trips during the rainy season.
At sea, the trawler continuously trolls, hauls, sorts
(i.e., separates fish and other seafood from shrimp),
Netherlands chemically treats, grades (by type and size), packages,
36% and freezes the catch. In this method, not much
Source: Yee and Paludetto (2005). processing in terms of shelling or de-veining is in-
volved compared with some international chains
that entail more processing (and value-adding) activ-
suppliers on a free on board (FOB) basis at the port ities. As each catch is hauled aboard the boat, the crew
of Lagos, where the product is transferred to con- operates according to the HACCP program that com-
tainer ships bound for Europe. A cold chain keeps the plies with health safety standards as accepted by the
product frozen throughout the supply chain from European Commission.17 The successful adoption by
trawling to final delivery, a procedure that meets the the Nigerian shrimp industry and approval by the EU
Hazard Analysis and Critical Control Point (HACCP) countries of the HACCP plan is one of the key rea-
standards required by EU authorities, and which is sons for market acceptance in Europe.
critical for market entry in Europe. By the end of the voyage, the average catch is
Nigerian suppliers of shrimp to the EU market are about 8 tons of shrimp and 12 to 15 tons of fish.18 The
represented by a trawling industry of about 20 com- trawler docks at privately operated jetties where
panies. The largest companies are Atlantic Shrimpers much of the landside facilities were renovated or
(70 trawlers) and Ocean Fisheries (21 trawlers). built by the shrimp fishing industry. The extension
Medium-sized companies, such as Banarly Group of the cooling chain from sea to land is facilitated by
(14 trawlers), also are very active. Other companies cold storage facilities built by the industry adjacent
in the industry are mainly small, owning a handful of to the landing docks. The shipment of frozen shrimp
trawlers each. The shrimp value chain in Nigeria has is quickly transferred by truck to the cold storage fa-
a relatively short chain, unlike the textile or leather cility where it is kept until the consignment is ready
sectors, although it is fully integrated in an interna- to be exported. Prior to exportation, the Federal De-
tional supply chain. partment of Fisheries samples and analyzes the con-
The primary activity in the value chain is the catch- signment to ensure that it conforms to international
ing and processing of wild (white, tiger, and brown) health standards. Upon successful pre-shipment
shrimp along the Nigerian coast, preferably during the
rainy season from June to November. Each trawler is 17. Nigeria was included in the EU “Decision 2001/635/
stocked with fuel, stores, and supplies to last for EC-Part 1” list of countries in 2001. Under this arrangement, the
Federal Department of Fisheries was designated the Competent
about 50 days. The stores and supplies consist of
Authority or central point of responsibility.
consumables used during the voyage, primarily 18. The frozen fish, known as the by-catch, commands a low
sodium metabisulfite, a chemical treatment applied value and is sold in the local market.
Figure 4 Shrimp Trawling Value Chain for Nigeria
Pre-Voyage Processing Storage &

Stage Stage Distribution Stage
Shrimp Shrimp
Voyage Trawling & Storage &
Preparation Processing Shipping
Steps include: Steps include: Steps include:

• Processing P.O.S. • Trawling • Berthage
• Preparation for • Hauling • Dockside Handling &
Receiving Intermediate • Sorting Drayage to Cold Storage
Goods • Chemical Treatment • Cold Storage
• Ocean Ship Berthing • Grading • Processing Sales Orders
• Terminal Handling • Packaging • Preparati8on for Shipping
• Import Border Clearance • Freezing • Pre-shipment inspection
• Pick-up & Inland • Storage • Stuffing & Draying to Port
Transport • Berthage • Export Border Clearance
• Warehousing Storage • Terminal Handling & Loading
Source: FIAS. “Nigeria: Value and Supply Chain Study.” March 2005.
Figure 5 Shrimp Value Added and Shipment Value Breakdown

16
2.3 14.9
14
0.5
1.8
12
1.1
Value (million naira)
10 0.9
4.7
8
1.4 0.2
4
1.9 0.2
2
0
Inp iate
tic d
na nd
el
ce
he n.
tic d
its
Va ent
ita
bo
gis un
gis un
Fu
er mi
an
te ir a
of
s
ad
lue
p
La
ipm
Lo nbo
Lo tbo
d
ut
nc
Ov Ad
Ca
Pr
ur
me
ain pa
Ins
Ou
Sh
I
er
M Re
Int
Source: Yee and Paludetto (2005).
Figure 5 illustrates the value chain shipment value breakdown. For this VCA, a medium-sized company was used as a case study to represent the value
chain for the entire industry. The case study was based on an order from a customer in France for 15 tons of shrimp to be delivered FOB at Port Lagos at
a value of about 15 million naira. The ordered shipment is equivalent to the catch of two trawlers out at sea on a voyage for 50 days.
inspection, the consignment is then stuffed into an ital charges, which account for almost 10 percent of
empty reefer (refrigerated) container and drayed to the shipment value, are the third largest cost driver
the Apapa container terminal in Lagos for customs in Nigerian shrimp operations. Annual nominal inter-
clearance and transfer to a container ship. est rates at the time of the study were 19 percent com-
Fuel, used for vessel operation and for the cool- pared with 13 percent in India, 5 percent in China,
ing chain (a critical necessity for a perishable prod- and 12 percent in Bangladesh.
uct adhering to international standards or HACCP), Despite the high cost elements, the value added
is a key cost driver at 32 percent of the shipment by the shrimp chain covers both the primary input
value. If the shrimp do not remain frozen, the prod- costs as well as the logistics costs and generates prof-
uct will not be exportable. As a member of the Or- its. The profit rate is 18 percent of the value added.
ganization of Petroleum Exporting Countries, Nige- This “success” is a turnaround for a previously declin-
ria suffers from not only high fuel costs but also ing industry.
sabotage of pipelines that cause enormous uncer- Two major factors have contributed to the sector’s
tainty in supplies. positive results. First, the nature of shrimp as a prod-
Administrative overhead costs at 12 percent of uct is inherently high value. Second, the quality of the
shipment value are high, but consistent with the rest product meets international quality standards as de-
of the economy. The study revealed that a typical termined by HACCP. Incorporating HACCP quality and
shrimp firm must adhere to 46 regulatory compliance production standards has given the Nigerian shrimp
procedures. Of these, 29 procedures apply to all fishing industry access to EU markets, which are will-
firms and 17 are specific to the shrimp sector.19 Cap- ing to pay premium prices for high-quality goods.
19. Please see Chapter 3, Tables 5 and 6 for a detailed list of

the regulatory compliance procedures.
Value Chain Analysis—
2
the Key Elements
Basic Framework
The VCA framework centers around three major seg- Quantification of the value chain by measuring
ments that describe each production link in the value monetary value and time is undertaken along the
chain: source, make, and deliver.1 Figure 6 shows source-make-deliver construct for each production
the framework for an extended cattle industry value activity. This measurement framework provides a
chain. Each activity mapped on the value chain dia- consistent way to organize and classify cost and time
gram can be represented by a cost breakdown. figures for comparison across diverse production
This framework is flexible and can be applied to activities. The resulting monetary value and time
value chains irrespective of their length. For exam- measurements are then further analyzed and trans-
ple, the cattle industry represents a multistage pro- formed to derive metrics such as value added and pro-
duction system and, as shown in Figure 6, the source- ductivity to identify performance gaps. Firm-level
make-deliver framework can be applied to categorize performance is measured and inferred for the sec-
the various products emanating from it. From a sup- tor as a whole. Establishing benchmarks for selected
ply chain perspective, the cattle industry is linked to indicators against competitor countries, good prac-
downstream industries in meat, leather, and dairy, for tice cases, and international standards can help in as-
instance. The leather chain could be extended to sessing the relative competitiveness of the sector.
the higher value-added leather shoe industry (or As shown in Figure 7, the value chain analysis typ-
leather bags). In practice, the length of the chain being ically includes the following key elements or steps:
analyzed depends on the objective and scope of the
project in dialogue with the client. • Choose the sector(s) to assess;
• Analyze the market;
• Map the value chain;
1. The source-make-deliver construct is an adaptation of the • Measure the performance of the chain and estab-
Supply-Chain Operations Reference (SCOR) model that was de- lish benchmarks;
veloped by the Supply Chain Council and integrates business
process reengineering, benchmarking, and process measurement • Analyze performance gaps (focusing on govern-
into a cross-functional framework for use as a management tool. ment and market failures);
9
Figure 6 Extended Value Chain of Cattle Industry
Food Processing
Source Make Deliver
Source Make Deliver Source Make Deliver

li
Cattle Leather Shoes

Leather
Meat
Policy Institutions Infrastructure

Source: Subramanian (2007).
• Establish recommendations for policy changes The relevant issues to examine at this stage in-
with potential downstream implementation. clude: import tariffs, import restrictions, delays in ob-
taining raw or intermediate materials, the share of im-
Each element is discussed in more detail in the sec- ported versus domestic sources for materials,
tions that follow. Several of these elements—choos- subsidies, applicable taxes (including value-added
ing the sector, analyzing the market, measuring the taxes), competition policy, transport and trade logis-
performance of the value chain performance and tics. Costs and the time to source materials should
establishing benchmarks—require data collection. be measured where applicable.
Some data is available within the public domain and
from existing sources, whereas other data require tar-
geted field interviews. Also, while the steps shown Make
in Figure 7 are laid out in a discrete fashion, a fair level
of interaction occurs between the various elements. To make, as the word implies, refers to the processes
necessary to transform raw or intermediate inputs
into a finished product. This finished product either
Source becomes an intermediate product that is further
transformed (e.g., yarn, which may be used to make
To source refers to the process of procuring goods and fabric), or the final product a consumer purchases
services required as inputs in the main production (e.g., leather footwear).2
process for a product. This product will either become
an intermediate input in the next stage of production 2. It is also important to account for any by-products that re-
or will be sold to the consumer as a final good. sult from production that can be sold or disposed.
C H A P T E R 2 . VA L U E C H A I N A N A LY S I S — T H E K E Y E L E M E N T S 11
Figure 7 Key Elements of Value Chain Studies
Measure
Sector Market Value Chain Performance & Analysis of
Choice Analysis Mapping Benchmark Performance Gaps
International & Government failures

Domestic Market failures
▼
• Contribution to • Industry trends • Process Activity • Factors costs • Taxes, Tariffs and Non-tariff
GDP • Market shares/ Breakdown • Transaction barriers
• Private trends • Industry costs • Infrastructure/utilities service
Investment • Price trends Structure • Value added quality, price
• Policy • Competition • Regulators & • Productivity • Regulatory barriers &
Relevance policy Commercial enforcement
• Employment • Links to global Agents • Administrative barriers
Potential value chains interaction • Market structure & Competition
• Local Value • Technological policy
Added trends • Factor market rigidities
• Implementation • Global Policy • Price restrictions/Subsidies
potential trends (e.g.,Trade) • Product quality and standards
PROJECT IMPLEMENTATION
Source: Subramanian (2007).
Accounting for the monetary value and time for It is also important to obtain information about key
activities in the make phase of VCA should include policy issues affecting availability and productivity of
the primary factors listed below (note that cost and the factors of production. For example, labor costs
time associated with raw and intermediate inputs need to be supplemented by information about labor
are taken into account as part of the source process): mobility, hiring/firing practices, labor laws and regu-
lations, union activity, and labor productivity measures.
• Land
• Labor (not including administrative overhead
costs) Deliver
• Capital charges (interest charges, depreciation,
and returns to capital) The deliver phase of VCA examines the moving of fin-
ished products or services to either the next produc-
Data on the following secondary items should tion activity (e.g., printed fabric for apparel) or to the
also be included in accounting for the make seg- final consumer (e.g., shirts). This segment includes
ment of a VCA: the following activities:
• Cost and quality of utilities (power, fuel, water, • Preparation for outbound shipping (clearing
telecommunications, etc.) agents, clearance documents, etc.)
• Administrative overhead (time to address and • Pre-shipment inspection
manage red tape/bureaucracy, management time • Export border clearance (customs, other govern-
for administrative matters, unofficial charges, other ment clearance)
overhead charges) • Port and terminal handling
• Equipment (including repair and maintenance) • Outbound line-haul transport
• Capital carrying charges in transit b. Does the product value chain involve less-
• Shelf loss in transit/storage developed regions in the country?
• Wastage, returns, price markdowns 7. Does the sector offer the potential to establish
• Emergency shipment or change policy with broad impact? Would these
changes in policy improve the overall business
environment for private sector development in
Sector Choice the country?
8. Are there any indications about the sector’s
Determining the sector or sectors (or subsectors) readiness for reform and change?
on which to perform a value chain analysis is a com- 9. Is there enough demonstrated support for pol-
plex decision that requires balancing multiple inter- icy reform?
ests and objectives. In practice, a request for a VCA 10. Are international benchmarks available?
from a client country or from another WBG unit is
accompanied by suggestions for sectors to assess. The The criteria for choosing a subsector or product for
ultimate sector or subsector choice is usually an it- which to perform a VCA directly follow from the pa-
erative process that occurs through discussions with rameters that determined the initial sector choice. If
the client government, private sector stakeholders, the focus is on the agribusiness sector, for instance,
and donor agencies including the WBG and the task it will be necessary to know which agro-based prod-
team (including other actors where appropriate). ucts are most important to the country. As a case in
Although the questions listed below are not ex- point, in Indonesia the government identified a num-
haustive, they could provide a useful basis for choos- ber of agribusiness product lines as vital to the coun-
ing which sector(s) to assess.3 The weight assigned try’s export growth strategy. The answers to several
to any of the questions will depend upon the specific of the questions listed above indicated that farmed
country context and the objective and scope of the shrimp would be a useful subsector on which to focus
project. because it would offer significant policy insights for the
government’s agricultural export strategy.
1. What is the underlying objective of the proposed Although a detailed, quantitative VCA focuses on
project? How does it relate to other relevant a subsector or product, the analysis must be placed
projects in the country? within the context of the entire sector. For instance,
2. How does the sector choice fit with the overall if one chooses to perform a VCA of horticulture,
country strategy? and pineapple is the product for the detailed analy-
3. What is the sector’s contribution to the country’s sis, it is important for the task team to present the
GDP? What is the growth potential of the sectors pineapple value chain in the context of the entire hor-
(globally and nationally)? ticulture industry in that country (and external mar-
4. What is the sector’s contribution to the country’s kets where appropriate). The broader sector issues
exports? must be covered in the market analysis stage.
5. Does the sector have the potential to attract
(further) private investments?
6. What is the potential within the sector to re- Tip: Economic data facilitates sector choice; it also
duce poverty? provides pertinent background information re-
a. Does this sector offer significant current or po- lating to the business environment, which is use-
tential employment generation? ful in interpreting the VCA results where firm
performance is linked to value-adding activities
3. Desk research using various data sources may answer many and public sector policies and responsibilities.
of these questions.
Market Analysis 12. Enforcement of property rights and regulations

and the need for informal payments, which might
A value chain analysis requires a solid understanding include an assessment of the following:
of the subject country’s standing in the world econ- i. Level of foreign direct investment in the
omy using trends in production, consumption, ex- industry and its trend
ports, imports, prices, macroeconomic performance, ii. Sector’s share in gross domestic product
monetary indicators, sectoral contributions to GDP, iii. Sector’s share in exports
general policy and trade policy regime, and so on. iv. Percentage of employment accounted for by
After the sector or subsector has been determined, the sector
the next step in a VCA is to conduct a market analy- v. Level of vertical integration of the industry
sis to obtain a strong basis for understanding indus- vi. Assessment of informal activity in the
try trends and issues both in that country and in the industry/sector
international market (See Box 1 for relevant ques-
tions). Some of the factors that might be examined Most market analysis data can be obtained from
in this phase include the following: secondary sources such as published statistical data-
bases, country or commodity reports, and through
1. Market trends (global and national): values, vol- direct interviews with domestic industry and trade as-
umes, market growth, and share sociations and relevant government agencies.
2. Price trends of the final product, and the main
raw or intermediate inputs
3. Current structure of the industry and market: Tip: Use domestic and international industry
competition levels and entry-exit barriers associations and industry specialty publications
4. Key suppliers and key markets: linkages with such as those published by the United Nations
global value chains, which might include a quick Industrial Development Organizaiton (UNIDO)
assessment of the following: and the International Trade Center. Conduct in-
i. What is the competitive advantage of each terviews with importers, retailers, and branders.
major producing country?
ii. What is the share and potential of the In addition to understanding market trends in
domestic/regional market? the sector, it may also be useful to ask selected ques-
5. End markets: composition, structure, ease of tions to obtain an understanding of the demand side
entry, and reward structure of the issues through a buyer’s survey (Box 2). A
6. Market channels: the most effective and efficient buyer’s survey is particularly important for value
channels, and the types and efficiency of com- chains that are buyer-driven, such as apparel (buyers
munication linkages such as Wal-Mart, Target, The Gap, and JC Penney)
7. Market niche possibilities: growth potential, ex- or furniture (a buyer such as Ikea).
port potential, or both
8. International benchmarks used by the industry
9. Required quality and technical standards for Value Chain Mapping
achieving domestic and international competi-
tiveness A value chain map allows one to depict all activities,
10. Key technological trends actors, and relationships among segments of the
11. International or regional policy: whether the chain, and the interactions between producers and
product or service is covered by preferential intermediaries.
trade agreements between certain countries or Information from a market analysis is used in con-
different trading blocs junction with detailed firm data to understand the
Box 1: Sample Market Analysis Questions
1. What are the global market trends over time (in terms of 12. Does the sector have a large domestic/regional market?
value, volume)? 13. Does the state of physical infrastructure/utilities impede the
2. Who are the key global producers and suppliers? Which are productivity of the sector?
the major importing countries? 14. What is the market structure of the industry (i.e., monopoly,
3. How has the world price of the product changed over time? oligopoly, perfect competition, monopolistic competition)?
4. How has the world price of (raw and intermediate) inputs 15. Is there a dominant firm in the industry or are there several?
to this product changed over time? 16. Are there entry barriers to new firms?
5. What is the level of foreign direct investment in this indus- 17. What is the level of vertical integration of the industry?
try? What are the trends? 18. What is the market share of the following along the value
6. At the country level: chain: (i) multinationals; (ii) domestic firms in the formal
• What percentage of GDP does this sector constitute? sector; (iii) informal producers?
What is the sector’s share of exports? What is its share 19. Is there a level playing field among producers and firms (e.g.,
of foreign direct investment? small vs. large, foreign vs. domestic, formal vs. informal) on
• What percentage of employment is accounted for by issues such as:
the sector? • Enforcement of taxes, import tariffs, product standards,
• What is the country’s position in the global market? etc.
• How has the country market share changed over time? • Access to formal sources of financing (banks)
• What is the sector’s potential for growth and exports? • Access to key public utilities (e.g. energy)?
7. In what trade policies does the country participate? Do 20. Who are the new entrants in the sector? Who has left the
any regional partners share special trading rights? market? Why? Are there licensing restrictions for new en-
8. Are there applicable specific product quality standards or trants? Do transparent criteria exist for allocating licenses
required processing standards? and permits?
9. What competitive advantages do major producing nations 21. How disaggregated is the global value chain (e.g., trade to
have? What competitive advantage does this country have? global sales ratio; outsourcing trends)?
10. Does the sector serve a niche market?
11. Does the country have preferred access to key global
markets?
sourcing, production, and delivery segments of an in- • The framework for allocating costs, rewards,
dustry at micro levels. (See also Box 3). This process rents, and value added to the appropriate chain
of obtaining disaggregated information about a firm participants.
(or a farm) or about a number of firms (or farms) and
subsequent extrapolation to an industry or sector al- Tip: Firm-level business process reengineering
lows one to better understand: studies and industry association benchmarking
studies can be used to develop a value chain
• How a firm (or a farm) is linked to its industry,
map.
region, country, and global chain, thus facilitating
an analysis of the opportunities that the firm (or
farm) faces in upgrading its processes and strate- The figures that follow illustrate a value chain
gically positioning itself in the value chain map for coffee production in Honduras. Figure 8
• The relative strength of the segment in the chain shows the physical production process; Figure 9
(e.g., yarn spinning in a textile-apparel chain) shows the structure of the coffee industry; Figure 10
• Key institutions, intermediaries, service providers, illustrates the key regulatory and commercial agents
and their interaction in the coffee industry and how they interact.
Box 2: Sample Questions for Buyers
1. What are the criteria that drive your decisions to obtain • Fast speed to market
products from new markets/countries? How important is • Sophisticated level of services (i.e., full package for
each of the following? apparel)
• Political and economic stability • High labor standards
• Labor costs • Good product mix
• Workforce skills • Low average defect rate
• Labor productivity • Short order to delivery cycle time
• Geographic proximity to markets • High flexibility in size and scale
• Trade agreements 3. What is the contract length you usually set with your
• Corruption suppliers?
• Social and environmental standards and practices 4. Who are Country X’s main competitors in Sector A? How does
• Government regulations and administration Country X rate against other competitors or key interna-
(bureaucracy) tional exporters?
2. What criteria do you consider in deciding from which com- 5. How do you assess quality?
pany or country to obtain products? • Standards set by your company
• Previous established buyer-supplier relationship • International standards
• High workforce skills • Other metrics (specify)
• Low cost of production other than labor 6. What is your policy on defective or low-quality products?
• High workforce productivity 7. What is your policy on delayed delivery?
• Low labor costs 8. What type of financing terms do you demand from suppliers?
• High product quality
Box 3: Sample Questions for a Mapping Exercise
1. What is the “cradle to grave” process map of the industry?

2. What are the by-products created in the industry? What is the value of these
by-products?
3. Differentiate between production oriented for export and that for domes-
tic markets.
4. Differentiate between small-scale vs. large-scale enterprises.
5. What are the key subsectors that drive value in the industry?
6. Who are the key intermediaries? How many of these are formally regis-
tered enterprises?
7. What are the contractual norms in the firm/sector at the buying and sell-
ing ends?
• Ordering procedures
• Payment terms
• Inspection requirements
Figure 8 Value Chain Mapping of Activities: Coffee in Honduras

Typically performed by exporters
Typically performed by medium to large coffee farms
Export
Typically performed in coffee farms Intermediary
• Marketing
Direct sale to Wholesalers or Retailers

Humid Dry Threshing / • Quality
Seed Farming Harvest control
Process Process Selection
• Logistics—
• Land • Shade • Cut of • Wet milling • Quality • Thresing transport to port,
preparation regulation coffee • De-pulping control • Selection sea freight,
• Land • Trimming grapes • Fermenting • Drying • Packing outbound
analyses • Cleaning • Transport • Washing (mechanical (sacks) logistics
and • Land analysis of grapes • Aerating drying)
sampling and sampling • Drying • Cooling Toasting
Key Activities
• Fencing (for fertilization • First • Storage • Toasting

• Purchase/ plan) selection • Selection
transport of • Fertilization • Packing • Grinding
coffee plants • Fungicide (sacks) (optional)
• Irrigation application • Storage
system/ • Phytosanitary
materials control
Packing
• Planting of • Packing
coffee trees
• Planting of Domestic
shade plants
Market
• Marketing and
Sales
Source: World Bank Group (2005d), Honduras Coffee Value Chain.
Figure 9 Honduran Coffee Value Chain Dynamics: Structure of Industry
+ High Number of Participants Low –

lH
Specialty Estate
Producing Countries
Larger Producer
Small Holders + Wet Mills + Wet Mill
Exporter
Wet Mill Broker / Domestic

Trader
Dry Mills
International
Trader
Office Coffee
Service
Consuming Countries
Consumers Distributor
Restaurants / Regional / National Importer /

Cafes Roasting Company Broker
Dry Mills
t Mill
y Estat
Local / Micro
Roasting Company
Retailer /
Supermarket

Figure 10 Honduran Coffee Cluster: Interaction of Stakeholders
Support and Support Services

Producer
Regulation Transport
Organizations
Authority Suppliers AHPROCAFE Financial
Laboratories Services
FHIA, CESCO Fuel ANAHCAFE
Security / Guard
Research LA CENTRAL Companies
FHIA, IICA
Fertilizer
UNIOCOOP
IHCAFE Sacks Consumers
FCN
Bags Retailers
CNC
Equipment Wholesalers
SAG & Machinery
SECRETARIA
Coffee Producers Toasters TOSCAFEH
DE AMBIENTE
International
Intermediares Commerce
Exchange
Sack Exporting
Importers Prod
Cooperatives
Traders
Equipment Exporters – National/
& Machinery International Industrials
Green Seal
Maintenance
Wholesalers
Works
Sea Freight Services Retailing
Services / Insurance
AHDECAFE Consumer

Measuring
3
Performance and
Establishing Benchmarks
Metrics
A qualitative mapping process of an industry or sec- Interpreting cost and time in a meaningful way and
tor is followed by cost and time measurements of the then relating it to policy and institutional factors re-
disaggregated segments of the value chain (Box 4). quires establishing benchmarks and conducting a
The performance of an industry or sector may be performance gap analysis. It entails tracing the over-
explained by: examining various activities in the pro- all performance of the supply chain and sifting
duction chain and comparing these with national or through the layers of qualitative and quantitative in-
international benchmarks; identifying gaps in per- formation (obtained from mapping the value chain;
formance; and probing into the underlying policies, computing time, cost, added value and productivity;
institutions, and infrastructure-related inefficiencies benchmarking; and drawing out policy insights) to
that directly affect productivity and competitiveness. reveal the underlying reasons for the gaps, which
The metrics used to measure the performance of often point to priorities for action. These reasons
a value chain include: could include policy distortions, institutional ineffi-
ciencies, infrastructural gaps, factor market rigidi-
1. Cost ties, and market failures. This stage of analysis essen-
2. Time tially involves compiling and evaluating information
3. Value added and data from multiple sources to determine cause-
4. Productivity and-effect relationships.
The tracing process needs a systematic approach
Cost and productivity are the underlying factors with a starting point that will then be linked to crit-
in determining the competitiveness of an industry. ical areas that underlie specific causes linked to pol-
Costs encompass both monetary costs (such as raw icy distortions, institutional inefficiencies, infrastruc-
material costs, input costs, and utility costs) as well tural gaps, factor market rigidities, and market failures.
as transactions costs (such as time delays, red tape, It is critical to choose the right starting point—and
and regulatory barriers). therefore the appropriate metric, which should help
19
Box 4: Cost and Time Measurements
Disaggregating costs along the value chain in transform- vices, communications, energy) to identify the causes of
ing raw and intermediate inputs into a final product helps changing cost pressures.
to identify key cost drivers that influence the final landed Similarly, time measurement of disaggregated activi-
price of the product. The cost drivers can be examined and ties along the chain provides significant insights on per-
linked to macroeconomic factors (e.g., interest rates, for- formance, and facilitates in identifying problem areas.
eign exchange rates), microeconomic factors (leasing Time measurements can also be monetized through mea-
costs, wage rates, import bans, export subsidies, border sures such as carrying charges, storage and warehous-
controls), and social factors (labor disruption) as well as ing costs, and inventory costs.
physical infrastructure and utilities (roads, transport ser-
in evaluating the overall competitiveness of the chain. • Ministry of agriculture

A useful metric in this context that yields a tractable • Licensing boards
measure is the shipment value or, more specifically, • Quality assurance agents
the FOB price of a consignment at the point of trans-
fer to the buyer. (See also Box 5.) Sources for obtaining information on supply chains,
The cost and time measurements for the chain of logistics, and trade transactions include the following:
activities usually follows the source-make-deliver con-
struct. Although some of this data may be obtained • Freight forwarders/multimodal transport operators
through prior sector studies, the detailed steps that • Shipping line and shipping agents
occur in the production and logistical process are • Transport carriers (truck, rail, air)
typically best obtained through direct interviews. Any • Port authority (sea/air)
relevant secondary data (e.g., prior studies) can be • Customs services
used to validate and compare the current study infor- • Commercial banks, exchange control agencies,
mation. Within a firm or business, the following indi- the central bank
viduals are potential candidates for the interviews: • Pre-shipment inspection agencies
• Chambers of Commerce
• Business owners/proprietors • Departments of trade/external trade
• Operational managers/production supervisors
• Material procurement managers/supervisors Value added and productivity are useful measures
• Product delivery managers/supervisors to show whether a firm is competitive in its current
• Marketing managers/supervisors operating and regulatory environment. Value added
• Financial managers is defined as the value of output at market price (fac-
tory gate price, or more often, the FOB price) minus
Other sources for obtaining information about the value of all intermediate inputs purchased from
industry policies, regulations, institutional agencies, other firms. Value added thus represents the contri-
and technical standards include the following: bution of, and payments to, the primary factors of pro-
duction and can be defined as below:
• Suppliers
• Industry associations Value Added =
• Ministry of trade or commerce FOB Price of Shipment –
Value of Intermediate Inputs (ex-works)
• Ministry of industry
C H A P T E R 3 . M E A S U R I N G P E R F O R M A N C E A N D E S TA B L I S H I N G B E N C H M A R K S 21
Box 5: Methodology
Because value chain data is computed on the basis of a mation from several sources to come up with a represen-
shipment or consignment value, the methodology for as- tative value chain.
sessing cost and time essentially requires a case study ap- Depending on the structure of a subsector or an indus-
proach. However, because the objective of the study is not try, more than one value chain map and quantitative dis-
to advise a single company but to understand competitive- aggregation may be required. For instance, Kenyan cof-
ness from the perspective of a subsector or an entire sec- fee is produced by both small producers and large
tor, one must check the consistency of the data from the commercial plantations. The cost structure and the mar-
firm that is the object of the case study by conducting in- ket and business environment that small producers face
terviews with other firms, industry associations, service are very different from those that plantations face. Thus,
providers, and government agencies. The methodology in- to understand the coffee sector it is important to differen-
volves comparing the data from the case study with infor- tiate the analysis for the two types of production models.
The more value a firm can add to a product for a

Tip: Should transport and logistics costs be in-
given primary and intermediate cost configuration,
cluded in value added computation? The contract
the greater its profitability. The potential to add value
of sale will specify the point of ownership trans-
to a product lies in a firm’s ability to keep raw and
fer through the specified INCOTERMS and this
intermediate input costs as low as possible and to in-
will in turn define who bears the costs of trans-
crease the price of its finished product in the mar-
port and logistics. The terms of trade used for
ket. Given that most firms in developing countries
analysis should be those that have been deter-
are price takers, value added therefore is dependent
mined to be most prevalent or typical in the sec-
on the following two factors:
tor and country.
1) Productivity: Greater productivity enables higher
levels of final output given a particular configu- duction are transformed into output. Traditionally,
ration of inputs. Productivity is one of the criti- productivity measures have focused on labor and
cal factors in determining competitiveness. capital. More specifically, examples of labor produc-
2) Costs of production: Costs of production are tivity include output per labor hour worked or value
affected by policies, institutions, and the indus- added per labor hour. Examples of capital productiv-
try structure that governs the supply of primary ity include return on assets (ROA) or return on eq-
and intermediate inputs. These could include uity (ROE).1 Other productivity measures can be de-
tariffs on imported inputs, poor logistics that rived for factor inputs. For example, in an agricultural
cause delays in import procurement, licensing re- industry, yield per hectare (for fruit and vegetable
strictions that impede lower-cost domestic sup- crops, for example) and feed-conversion ratios (for
plies or the poor enforcement of standards that shrimp and livestock, for example) are computed as
affect the cost and quality of inputs; labor costs; standard productivity measures.
poor utility services; and so on.
The basic measurement units that should be com- 1. Productivity metrics are analyzed at the firm level. These
puted as part of a value chain analysis include those measures also apply to macroeconomic analyses such as those for
an entire industry or a nation. For a discussion on sectoral pro-
listed in Box 6. (See also Figure 11.)
ductivity measures see Palmade (2005). For national productivity
Productivity measures the efficiency with which measures, see OECD (2001), Pilat and Schreyer (2004), and
primary and intermediate inputs and factors of pro- Schreyer (2001).
Value Adding Total Value Added

Box 6: Shipment Value Metrics Efficiency = (Labor Costs + Depreciation)
• Intermediate inputs as a percentage of shipment The value added of an industry or sector is a use-
value (or FOB price) ful measure for understanding the sector’s potential
• Value added as a percentage of shipment value as a source of growth for the overall economy. “Value
• Value added as a percentage of the total wage added as a percentage of GDP” and “value added as
costs a percentage of exports” are proxies for the growth
• Logistics costs as a percentage of shipment value of an economy and could be considered key private
• Inventory cost as a percentage of shipment value sector development indicators. These also facilitate
• Cost of factor inputs: the measurement of productivity. Examples include
! Land as a percentage of shipment value
“value added per labor hour” and “value added per
! Capital as a percentage of shipment value
unit of capital invested.”
! Labor as a percentage of shipment value
Profit margin is another useful indicator of a sec-
• Administrative overhead as a percentage of
shipment value
tor’s performance and can be represented by the for-
• Cost of utilities as a percentage of shipment value mulae below:
• Repairs and maintenance as a percentage of
shipment value (FOB price of shipment) minus
• Profit as a percentage of shipment value (the costs of raw and intermediate inputs)
minus (costs of primary inputs) minus (costs
of transport/logistics services)3
or
Tip: Physical measures of productivity such as (FOB price of shipment) minus (total cost of
spinning output per worker hour or packing production) minus (cost of delivery)
rates per worker day in the textile industry do not
directly come out of cost and time measure-
ments, but they should be collected through Benchmarking: Uses and Challenges
the interview process.
Benchmarking of key indicators along the value chain
helps to detect performance gaps and identify the
Whereas labor productivity can be computed with
main constraints to a firm’s competitiveness. More
data collected for the activity analysis, capital and eq-
importantly, it helps to prioritize constraints that di-
uity efficiency analyses require data on average asset
rectly affect the overall competitiveness of the value
values and average equity values, which likely will be
chain. Benchmarking is often complicated because
contained in financial statements if they are available.
reliable comparable data is often not readily available
The ability to compute inventory turnover and inven-
for all sectors and products. In practice, it is possi-
tory age for a consignment depends on being able
ble to identify key data points on which benchmarks
to obtain data to compute average inventory for the
can be obtained through industry experts and sec-
period in question.
ondary sources including research papers; think-
Value Adding Efficiency is a percentage measure-
tanks; and agencies such as the World Trade Organi-
ment that combines two input factors: labor costs and
zation (WTO), the Food and Agriculture Organization
equipment costs (as measured through deprecia-
tion). It is calculated using the following formula:2
3. Primary inputs include utilities, equipment maintenance,
and administrative overhead costs (in addition to labor, capital,
2. DTI, “2005 Value Added Scoreboard.” and land).
Figure 11 Factor Productivity Measures
Productivity Metrics Labor Productivity

• Output per unit of labor hour • Shipment or consignment value per labor hour
• Value added per labor hour • Shipment or consignment value per labor cost
• Capital and equity efficiency • Output per labor hour
• Inventory turnover • Value added per labor hour
• Yield per unit of land (for agricultural analyses)
• Feed conversion ratio (aquaculture and livestock
analyses)
• Input conversion ratio
Capital Efficiency and Productivity Inventory Metrics

• Asset turnover ratio = Sales/average value • Average inventory levels
• Equity efficiency = Sales/average equity • Age of inventory = 365 days/Inventory turnover
Capital productivity measures from a financial

perspective are return on equity and return on
assets. They are expressed respectively as net
income dividened by average total equity and net
income divided by average total assets.
Figure 12 Sample Benchmark Indicators for a VCA
Value-Added Indicators
• Value added as a percentage of GDP Trade Logistics Indicators
• Value added per unit of labor hour
• Logistics costs as a percent of shipment value
• Value added per unit of capital invested
• Total time to process an import transaction
• Total time to process an export transaction
• Customs clearance times
Factor Input Indicators • Import logistics cost
• Wage/labor hour • Export logistics cost
• Working hours/day (or week) • Number of signatures required per trade
transaction
• Output producted/labor hour
• Percentage of import or export containers
• Shipment value/labor hour
inspected
• Cost (US$)/kwh
• Interest rates
fabric) in Kenya are almost three times those in Hon-

Box 7: Sample Questions for Establishing
duras. Both Kenya and Honduras are subject to trade
Benchmarks
agreements with the United States, through the
African Growth and Opportunity Act (AGOA) and
• What international benchmarks are used in the
the Central America Free Trade Agreement (CAFTA),
industry?
respectively.
• How do the factor costs (for labor, capital, and key
In addition to Kenya’s location, which increases
inputs) compare with best practice case firm in
the country, the region or the world?
ocean freight costs, two main underlying factors help
• How does the productivity (of labor, capital, and key to explain the cost differences: (i) trade logistics
inputs) of national firms in the sector compare with costs for imports at US$2,325 per twenty-foot equiv-
best practice case firm in the country, the region alent unit (TEU) in Kenya are 3.5 times that of Hon-
or the world? duras5; and (ii) the average tariff on imported fabric
• How does the capacity utilization of domestic firms is 17.5 percent in Kenya compared with 9.5 percent
in the industry compare with best practice case firm in Honduras.
in the country, the region or the world? It might be expected that for a labor-intensive
• How does the technology in the sector compare sector such as apparel, Kenya would have some com-
with best practice case firm in the country, the parative advantage given that Kenyan wages (at
region or the world? US$9.40/labor day) are on average much lower than
in Honduras (US$12/labor day). However, in mone-
tary terms the labor cost for a t-shirt in Kenya is still
(FAO), United Nations Industrial Development Or- higher than in Honduras. This is driven by lower
ganization, International Trade Centre, and the World labor productivity. On average, Honduran firms pro-
Bank Group. (See also Box 7.) In this regard, this reduce twice as many shirts as Kenyan firms assuming
port contributes to the benchmarking process by all other factors constant, a key factor in Honduras’
providing a consistent approach for the analytical greater competitiveness.
framework and use of appropriate metrics, and in Overhead costs in Kenya (at US$0.57 per t-shirt)
identifying a set of indicators that might be useful to are more than three times higher than in Honduras
plan for early in the project cycle (Figure 12). (at US$0.16 per t-shirt). This cost disparity is partly
A comparison of the Kenyan and Honduran ap- reflected in the time senior management in com-
parel industry value chains illustrates how bench- panies spends addressing government regulations
marking helps to prioritize critical constraints in the (8 percent of their time in Honduras compared with
value chain (Figure 13). It also reveals interesting in- 14 percent in Kenya). Also, the average time a sen-
sights into how policies and institutions play a cen- ior manager in Kenya spends in meetings with tax of-
tral role in affecting the overall competitiveness of the ficials is almost double that in Honduras.
industry in the two countries.4 Finally, outbound logistics costs (excluding ocean
At US$3.60, the FOB price of a plain cotton t-shirt transportation costs) in Kenya are almost four times
from Kenya is more than 2.5 times the FOB price of those in Honduras. The cost difference is further
a similar t-shirt from Honduras. What explains the dif- exacerbated by the quality of product as reflected in
ference in FOB price of a similar product? Benchmark- reject rates of more than 3 percent in Kenya. The ex-
ing of the individual cost elements in the value chain ample discussed here clearly illustrates that geogra-
of the two production processes reveals that Kenya phy alone is not driving the somewhat lower com-
has higher costs of raw and intermediate materials, petitiveness of the Kenyan apparel industry in U.S.
labor costs per unit of apparel, overhead costs, and markets, nor are lower average labor costs compen-
logistical costs. Raw material costs (mostly imported sating for other overriding constraints.
5. World Bank Group (2006), Doing Business 2007: How to

4. Subramanian and Matthijs (2007). Reform.
Figure 13 A Comparison of the Kenyan and Honduras T-Shirt Value Chains
SOURCE MAKE DELIVER
FOB Cost Per Import Raw Material Labor Cost / Outbound

Utilities Overheads
T-Shirt Dependence Costs T-Shirt Logistics
Kenya $3.60 ! 65% $2.30 $0.40 $0.05 $0.57 $0.28
Honduras $1.10 ! 80% $0.80 $0.25 $0.03 $0.16 $0.06
High Tariffs: Lower Wages Offset by Speed to Market:

Honduras: 95% Lower Labor Productivity Honduras: <15 days
Kenya: 17.5% Honduras: $12.00 / labor day Kenya: >30 days
Kenya: $9.40 / labor day
Impact of Rules of Origin High cost of Export Logistics:
Exacerbated by location and Honduras: 45–50 shirts / day Honduras: $500 / TEU
therefore transportation costs Kenya: 20–25 shirts / day Kenya: $1980 / TEU
High Cost of Import Logistics Regulatory Barriers High Incidence of Rejects:

Honduras: $670 / TEU % of Senior Management Honduras: <1%
Kenya: $2325 / TEU Time on regulations: Kenya: >3%
Honduras: 8.5%
Total Import Logistics Time: Kenya: 14%
Honduras: 39 days
Kenya: 45 days Days spent in meetings
with tax officials:
Honduras: 2.53
Kenya: 4.1
Source: Subramanian and Matthijis (2007).
Cost, Quality, and Supply of Raw and For instance, in Kenya’s apparel industry, high im-
Intermediate Materials port tariffs and poor logistics drive up the cost of im-
ported fabric. This increases the costs of apparel
Policy and market failures often lead to high costs, production. In Indonesia, the imposition of a 12 per-
poor quality, and difficulties in obtaining raw and in- cent VAT on all imported material that takes an av-
termediate materials. Raw and intermediate material erage of 1.5 to 2 years to reclaim seriously constrains
costs are often driven by: a firm’s working capital. This long turnaround time
for seeking VAT reimbursement comes with signifi-
• Trade policy distortions such as import bans or cant bureaucratic hassles and implies a cost equiva-
tariffs lent of 9 to14 percent of total profit for a typical
• Regional trade agreements that have rule-of-origin medium-sized textile export firm.6
requirements
• Anomalies in product standards that may provide
disincentives for using domestic sources. 6. FIAS (2006b).
Box 8: Questions to Consider when Assessing Cost, Quality, and Supply of Materials
1. What percentage of industry inputs (i.e., raw materi- 7. Are the criteria for allocation of licenses and permits
als) is imported? How do the price and quality of im- transparent? How long does it typically take to obtain
ports compare with domestic raw or intermediate ma- an import or operational license?
terials? 8. What are the contract terms between the buyer and
2. What kinds of protective measures such as tariffs, seller of intermediate inputs? What is the structure of
duties, or bans exist on imports? the prevalent buying relationships in the industry?
3. What is the quality of the sourced inputs? What are 9. What is the average lead time for sourcing raw or in-
wastage and defect rates? termediate material? Is there variability in lead time?
4. What kinds of certification do suppliers of inputs 10. What are the inventory holding costs? What part of the
require? inventory holding costs are due to firm inefficiency ver-
5. Are standards on quality of imported inputs enforced? sus policy and market factors outside a firm’s control?
Are standards of domestic production of inputs en- 11. How much time does management spend on locating
forced? Are national product quality standards aligned and obtaining supplies?
with international standards? 12. How often do disruptions occur in supply and why do
6. What kinds of policy restrictions (bans, licensing they occur? What alternate methods for acquiring in-
restrictions) affect the domestic production of this puts are in place? What is the associated cost?
material?
Poor logistics may result in a firm not being able banned chemicals, poor equipment and application
to obtain the raw and intermediate materials it needs techniques, poor disposal practices, uneven quality
in production in a timely manner, which means that of agrochemicals, absence of mixing guidelines, and
the firm must hold large inventories, which in turn the lack of surveillance and monitoring of quality
ties up its working capital. Some materials may be of standards.8
poor quality due to low standards or poor enforce- Monopolistic or oligopolistic suppliers supported
ment of standards that are then carried through to by protectionist policies can impose entry barriers to
the finished product, affecting the producer’s abil- newer and more efficient firms, and these policies
ity to command a premium price in the market. For may drive up the price of raw and intermediate ma-
instance, poor husbandry practices and inadequate terials. Restrictions on licenses for domestic produc-
abattoir regulations and enforcement mechanisms ers may play a big role in creating price distortions
made it difficult for the leather processing industry in the input market, which can lead to high admin-
in Nigeria to obtain high-quality skins, which lim- istrative costs. For example, shrimp producers in In-
ited the growth of high-quality leather production.7 donesia are required to renew their import permits
In another example, the main issues affecting the every six months.9
cut flower industry in Kenya are associated with the Relevant questions to pose at this stage of the
high cost of agricultural inputs—specifically, sprays VCA would assess non-tariff barriers, import tariffs,
and fertilizers. These are usually imported and not quotas, delays in obtaining raw or intermediate ma-
sourced from domestic firms due to poor enforce- terials, the share of imports versus domestic sources,
ment of quality standards in Kenya. Small and subsidies, applicable taxes including VAT, and com-
medium-sized enterprises (SMEs) in the cut flower petition policy issues. These questions should at-
industry faced a range of problems in using agrochem- tempt to measure the cost and time of these items
icals, including a lack of information on approved or where applicable (Box 8).
8. World Bank Group (2005c).

7. Yee and Paludetto (2005). 9. FIAS (2006b).
Box 9: Questions related to Factors of Production
1. What labor market regulations affect sector productivity? 10. What percentage of investment capital is obtained through
2. How do the personnel training programs of the average firm formal financial institutions? From retained earnings? From
compare with best practices in the sector? personal/family sources? From informal lenders?
3. How do issues related to corporate social responsibility 11. Do input suppliers provide the inputs for cash or on credit?
(e.g., environmental standards, child labor laws) affect the 12. What are informal sources of financing? What are the terms
sector? and conditions if funds are obtained from an informal
4. How do labor and capital productivity of the average firm source? Do they charge any interest, and if so, how much?
compare with best practice cases in the country, in the re- 13. Are other financial services required, such as insurance?
gion, in the world? Are such service providers available?
5. How do the costs of labor, capital, and other key inputs of 14. How do land market issues such as restrictive zoning laws,
the average firm compare with best practice cases in the administrative barriers to land registration, lack of clarity in
country, in the region, in the world? titling, and unclear leasing laws affect a firm or an indus-
6. Do restrictions on FDI affect the sector? Are there govern- try? How would these affect investors?
ment incentives such as tax breaks and concessional land 14. Is the industry largely based in an export processing zone?
for promoting FDI? What level of integration do these zones have with the rest
7. What are the key finance issues for the value chain? Dif- of the economy?
ferentiate between long-term vs. working capital: 15. What product quality standards apply?
• Capital market regulation/access to finance issues 16. What kind of in-house quality control takes place, if any?
• Within the banking system What is the cost?
• With collateral 17. Are there instances of down times in the production cycle?
• With creditors’ rights How often? Why? At what cost?
8. Is trade financing available from foreign sources? What is 18. How does the capacity utilization of domestic firms in the
the interest rate? industry compare with global practice?
9. What percentage of working capital finance is obtained 19. How does the technology on average in the sector compare
through formal financial institutions? From retained with global and regional best practice?
earnings? From personal/family sources? From informal 20. What percent of net revenue is allocated toward investment
lenders? in technology?
Primary Factor Cost Drivers vidual costs are benchmarked against those of com-
(Labor, Capital, Land) petitor countries or good practice cases is it possible
to understand the priority of the particular cost ele-
Primary inputs usually constitute a major cost in the ments in improving the competitiveness of a sector.
product transformation process. These inputs in- Previous value chain studies have shown that even
clude labor costs, capital charges, and land costs for a labor-intensive sector such as apparel, labor
(leasing or acquisition costs). cost is not always the driving factor that affects the
It is also helpful to examine key policy issues that sector’s competitiveness. For instance, even if wages
affect the cost, quality, and productivity of these in the Kenyan apparel industry were reduced to zero,
three main factors of production. (See also Box 9.) this would have little effect on the industry’s com-
For example, labor costs need to be supplemented petitiveness due to other overriding factors such as
with information about labor mobility, hiring/firing low labor productivity, import tariffs, and very high
practices, labor laws, regulations and standards, logistics costs.10 Similarly, in the Indonesian textile in-
union activity, and labor productivity measures. dustry it is not just the actual wage rate that matters.
Ranking the cost drivers as a percentage of FOB
price provides a quick snapshot of which cost ele-
ments really matter. However, only when these indi- 10. Subramanian and Matthijs (2007).
Table 1: Unit Labor Cost Comparisons tutions can enter into the equation, most business
sectors can improve the overall effectiveness and ef-
Normal Hours/
Country US$/hour Week ficiency of the value chain.
In Nigeria, the high cost of debt financing—with
China (Coastal) 0.76 44 nominal interest rates of 20 percent and greater per
China (Inland) 0.48 48 annum for short-term borrowing and about 16 per-
India 0.67 48 cent for long-term (4 years) borrowing—was a strong
Indonesia 0.55 40 disincentive to invest in new equipment. In another
Pakistan 0.37 48 example, machinery upgrades in the Indonesian tex-
Thailand 1.29 48 tile industry are markedly behind those in China,
Vietnam 0.28 48 India, and Pakistan, which severely affects productiv-
ity (Table 2). The high cost of repairs and maintenance
Bangladesh 0.30 48
often is the result of an obsolete plant and machin-
Sri Lanka 0.48 48
ery, which significantly increases operating costs. In
Hong-Kong 6.20 48
Indonesia, high repair and maintenance costs are
Source: Werner International 2004/5.
primarily due to constraints in obtaining credit from
commercial sources for upgrading textile technology.
Labor productivity in Indonesia’s apparel industry is
Additionally, high financing costs often lead to delays
less than that in coastal China by 30–50 percent.
in obtaining intermediate materials.
Poor labor productivity is exacerbated by overly rigid
Land-related issues in developing countries in-
labor market policies, strong labor unions, large sev-
clude ambiguous property rights, a lack of clear titling,
erance payments, and comparatively short working
uncertainties about user rights of leased land, uneven
hours (Table 1).
treatment of foreign versus domestic firms, and zon-
A common problem identified in value chains is
ing restrictions. In Mozambique, for instance, a value
difficulty in accessing financing for both working
chain analysis of the tourism sector revealed that the
capital and investments. This problem is especially
government owns most of the land, which it leases
acute among SMEs and in the agricultural sector.
on a long-term basis for development. However, firms
Without access to finance, many producers get stuck
were reluctant to invest in production ventures be-
in a low investment–low return production cycle.
cause of uncertainties and lack of clarity about user
Lack of finance may prevent a producer from plant-
rights and the labyrinth of administrative procedures
ing a crop, from investing in measures to increase pro-
associated with obtaining leasing rights.12 In addi-
ductivity, or from exploiting potential markets, Like-
tion, increasing competition for land-use rights for ex-
wise, financial constraints may prevent processors
pansion of tourism to attractive coastal areas (e.g., for
from expanding, which caps the amount of produce
snorkeling and scuba diving) was fueling conflict be-
they buy from local producers.
tween investors and rural communities (who use the
In general, the majority of agricultural finance in
land for farming, fishing, and other uses).
developing countries comes directly from within the
The value chain analysis recommended that the
value chain; namely, from buyers, sellers, or other
government provide investors in hotels and other es-
business associates, without the involvement of finan-
tablishments with a one-stop source of accurate in-
cial institutions.11 (See also Box 10). These efforts to
formation and processing of user rights for land,
access finance have been met with varying degrees
with a clear delineation of the roles and responsibil-
of success in matching demand with supply. By iden-
ities between the local and central levels of govern-
tifying relationships along the value chain, mitigating
ment. Additionally, the analysis recommended that the
constraints, and exploring how formal financial insti-
11. USAID, RAFI Notes: Value Chain Finance (Issue 2), June 12. FIAS (2006a), “The Tourism Sector in Mozambique: A
2005. Value Chain Analysis.”
Table 2: Shuttles Installed in Selected Countries
2004 Installed Total Shipments 1995–2004

Shuttleless Shuttle Shuttleless Shuttle
Country Looms Looms Looms Looms
World 860 1450 513 120

Indonesia 29 197 11 5
China 260 686 258 98
India 11 105 9 5
Pakistan 25 10 6 —
Turkey 21 30 21 —
Source: International Textile Manufacturer Association.
Box 10: Factoring
A major challenge for many small firms is accessing finance done “without recourse” in that the factor that purchases
for working capital. In particular, many exporters find it dif- the receivables assumes the credit risk for the buyer’s
ficult to finance their production cycles, because after ability to pay.
their goods are delivered, most buyers demand 30 to 90 Factoring can be a powerful tool in providing financ-
days to pay. Sellers issue an invoice—recorded for the ing to high-risk suppliers with a lack of market information.
buyer as an account payable and for the seller as an ac- Factoring’s key virtue is that underwriting is based on the
count receivable—which is an illiquid asset for the seller risk of the receivables (i.e., the buyer) rather than the risk
until payment is received. of the supplier. Therefore, factoring is particularly well
“Factoring” is a type of supplier financing in which suited for financing receivables from large foreign firms
firms sell their creditworthy accounts receivable at a dis- whose receivables are the obligations of buyers who are
count (generally equal to interest plus service fees) and more creditworthy than the sellers themselves.
receive immediate cash. The advantage of factoring is
that it is not a loan and there are no additional liabilities
on the firm’s balance sheet, but it does provide immediate Source: Leora Klapper. “Export Financing for SMEs: The Role of Factoring.”
working capital financing. In addition, factoring is often World Bank Group, Trade Note 29.
government take a proactive, community-driven ap- regulatory barriers, and charges for frequent repair
proach to preparing land for tourism activities. In that and maintenance can add significant costs to produc-
way, all land related issues could be addressed before- tion. (See also Box 11.) For example, producers in
hand with individual communities prior to the in- Honduras and Nicaragua face frequent electrical
vestors’ bids for developing such tourism assets. power brownouts or blackouts, which seriously affect
their production efficiency and costs due to frequent
interruptions in production cycles (Table 3).
Utilities, Administrative Overheads, Administrative overheads often constitute a signif-
and Other Costs icant proportion of production costs for firms in
emerging economies. To calculate administrative
Expensive and poor quality utilities, transaction costs overheads, it is useful to know, for example, what per-
due to bureaucracy and red tape, administrative and centage of time senior management engages in ad-
Box 11: Questions to Consider When Assessing Administrative

Costs
• What typical regulatory compliance procedures are required for an order-to-delivery

cycle for a typical trade transaction? Which agencies are involved? What are the for-
mal and informal charges/ fees?
• Are there industry specific regulatory compliance procedures required? What are
these?
Table 3: Electricity Indicators for Selected Countries
Cost of power Days of Power % of Sales lost due

Country US$/kwh Outage to power outages
Chile 0.057 3.73 1.56

Cambodia 0.2 4.88 2.24
Guatemala 0.116 9.45 2.52
Honduras 0.035 22.5 3.62
Nicaragua 0.128 23.01 5.15
Source: World Bank Group, Enterprise Surveys, database.
dressing bureaucracy. The Nigeria value chain study Table 4: Senior Management Time Dealing
indicated that for every dollar spent on labor, two dol- with Bureaucracy
lars were spent on senior managers’ time to address % of Senior Management Time on
bureaucratic hurdles, a multiplicity of government Country Administrative Barriers
regulations, and administrative procedures. Regula-
tory compliance is especially burdensome when ex- Nigeria 45%
cessive red tape exists in registering a business, pay- India 14%
ing taxes (corporate, property, and others), obtaining China 25%
import and export licenses, registering land, obtain- Brazil 8%
ing utility services, obtaining plant safety certification, Kenya 13%
and adhering to environmental protection and cross- Bangladesh 4%
border inspection processes. Table 4 shows that sen- Source: World Bank Group, Enterprise Surveys, database.
ior managers in Nigerian firms spend almost half
their time on administrative barriers. ing from land registration to corporate taxes, vehicle
It is useful to record the typical regulatory com- permits, utility charges, plant health and safety cer-
pliance procedures required for an order-to-delivery tification, and environmental protection. In addition
cycle or a typical trade transaction. As a case in point, to the 29 regulations, shrimp industries must com-
the Nigeria value chain study revealed that a typical ply with an additional 17 regulations for the shrimp
shrimp firm faced 46 regulatory compliance proce- sector (see Tables 5 and 6).13
dures. All Nigerian firms must comply with a mini-
mum of 29 regulatory compliance procedures rang- 13. Yee and Paludetto (2005).
Table 5: Nigeria: Regulatory Procedures (Economy Wide)
Unofficial
Official Fees Payoffs
Description Government Agency Frequency (Naira) (Naira)
1 Land Rent State Government annual 6.5 million

2 Value Added Tax Ministry of Finance annual 5% of purchase value
3 Corporate Tax Ministry of Finance annual 30% of net profit
4 Education Tax Ministry of Finance annual 2% of profit
5 Capital Gains Tax Ministry of Finance annual 10%
6 Nigerian Social Insurance Federal Government monthly 6.5% of basic salary
Trust Fund
7 Nigerian Housing Fund Federal Government monthly 2.5% of basic salary
8 Vehicle Registration Ministry of Transport annual 10,000
9 License for Logo Advertisement Local Government annual 2,500/vehicle
on Vehicle
10 Vehicle Pollution Inspection Ministry of Transport annual 1,500/vehicle
11 Hackney Permit for Private Ministry of Transport annual 5,000 2,000
Business Vehicle
12 Canteen License Local Government annual 10,000 10,000
13 Property Tax State Government annual
14 Electricity Charges NEPA monthly 8.5 / unit plus demand
charges
15 Water Charges Water Corporation monthly 25,000
16 Factory/Plant Health Certificate Local Government annual 70,000
17 Factory/Plant Environmental Fee Lagos State Environmental Agency monthly 50,000
18 Land Rent Local Government annual
19 Combined Expatriate Resident Federal Government annual 47,600 15,000
Permit and Alien Certificate
(CERPAC)—Entry into Nigeria
20 CERPAC—Re-entry permit into Federal Government annual 5,000 1,500
Nigeria
21 Expatriate Quota Fee Federal Government annual 50,000 10,000
22 Property Tax Federal Government annual
23 NEPZA Registration/Licence Nigerian Export Processing Zone annual 25,000/export
Authority
24 Capital Allowance Ministry of Finance annual
25 Surcharge on Import Duty Ministry of Finance every import 7% of basic duty
26 Corporate Tax Returns Ministry of Finance annual
27 Fire and Safety License Federal Government annual 10,000 10,000
28 Paye (employee deductions Federal Government annual based on
for tax at source, etc.) individual salary
29 Corporate With-Holding Tax Federal/State Government every contract 5% of service/contract
(WHT)
Table 6: Nigeria: Regulatory Procedures (Specific to the Shrimp Sector)
Unofficial
Official Fees Payoffs
Description Government Agency Frequency (Naira) (Naira)
1 Factory/Plant Health Certificate Nigerian Port Authority annual 3,500

2 Jetty License Nigerian Port Authority annual 0.35 million
3 Wharfage Levy Nigerian Port Authority every trip 5,000
4 Pilotage Levy Nigerian Port Authority annual 20,590/license 4,500/license
5 Lighter Terminal Levy Nigerian Port Authority annual
6 Documentation Fee Nigerian Port Authority every voyage 500
7 Vessel Survey Certificate Ministry of Transport annual 50,000/certificate 5,000/certificate
8 Berthing Permit Department of Navy ever sailing 4,000
9 Vessel Sailing Permit Department of Navy every sailing 2,000
10 Vessel Departure Permit Nigerian Drug Law Enforcement Agency every sailing 200/vessel
11 Vessel Arrival Permit Nigerian Drug Law Enforcement Agency every sailing 200/vessel
12 Pilotage Fee Nigerian Port Authority annual 20,590 /license 4,500/license
13 Cabotage License Nigerian Maritime Authority annual 2% of turnover
14 Bunkering Approval Fee Department of Navy every fueling 0.35 per liter
15 Radio License Ministry of Transport annual 4,800 2,500
16 Petroleum Licence Federal Government annual (barge) 10,000 2,500
17 Vehicle Entry License Fee Nigerian Port Authority annual 5,000
(Levied by Port)
Trade Logistics and Transport importers experienced at the ports. According to the
Doing Business data, the cost for average export doc-
The cost and quality of trade logistics and transport umentation in Bangladesh was US$158, compared
services is a key determinant in a firm’s ability to with US$30 in Indonesia and US$13 in Malaysia;
bring its products and services to the market in time. whereas trucking costs for an average 20-foot con-
Important indicators to assess the performance of the tainer amounted to US$245 in Bangladesh, compared
trade logistics and transport services include: trans- with US$180 in Indonesia and US$130 in Malaysia.
action times and costs to clear imports and exports, The time it takes to complete various import pro-
the number of documents that must be completed cedures are compared for three countries in Figure
and approved, the number of signatures needed in 14. Kenya and Honduras are plainly at a disadvantage
a typical trade transaction, waiting times at ports and compared to Spain, where it takes only 10 days to
terminals, customs clearance time, the cost of mov- complete an import transaction. Despite some sig-
ing containers, and inland transport costs14 (Box 12). nificant reforms that were recently undertaken in
In the Bangladesh ceramics industry, a heavy re- Kenya,15 several segments of the supply chain there
liance on imported inputs was exacerbated not only have barriers. The key bottlenecks in Kenya are in the
by the poor state of the Bangladeshi road network but
also delays at ports, which increased the delivery
times by several days; rent-seeking by customs and
15. Kenya allowed traders to submit customs declarations
port officials aggravating the problem exporters and before the goods arrive at the border, which reduced the amount
of time needed for goods to clear customs by three days. Kenya
also introduced new cranes at the port that would enable more
14. Hausman, Lee, and Subramanian (2005). efficient terminal handling activities (Doing Business, 2007).
Figure 14 Time to Complete Import Procedures (Honduras, Kenya, and Spain)
70 Step 1: Conclude purchase contract and transmit letter of credit

Step 2: Assemble and process documents for import
60 Step 3: Vessel waiting time to enter berth
Step 4: Berthing and unloading
Step 5: Terminal handling activity
50 Kenya: 45 days
Step 6: Customs inspection
Step 7: Technical control
40 Step 8: Inland transportation
30
Honduras: 39 days
20
Spain: 10 days
10
0
1 2 3 4 5 6 7 8
Steps
Source: Doing Business (2007).
time it takes to conclude a purchase and transmit let- cient terminal handling may keep ships in a berth
ters of credit, assemble and process documents, and longer than is necessary for loading or unloading. Bor-
transport goods inland. By sharing inspections, Hon- der clearance procedures in many countries are no-
duras was able to cut the waiting time at its border toriously slow. Inspections by customs and control
with Nicaragua in half. Despite this measure, the agencies (e.g., ministries of agriculture and health)
time required to complete an import transaction in are often sequential rather than simultaneous, which
Honduras is still very high. further adds to delays. These delays can be exacer-
In many countries, poor infrastructure and truck- bated by inspections of a high percentage of contain-
ing services imply significant costs and delays. The ers that pose little risk. A biased interpretation of du-
logistics cost for handling a 20-foot export container ties could lead to disputes and delays, which are
in Kenya is almost US$2,000. The carrier industry in sometimes resolved only through bribes.
many countries is fragmented, operators are not ori- Poor logistics services force firms to carry a larger
ented to offer customer service, equipment is old, and administrative staff, hold more inventory for longer
there is no protection through carrier liability insur- periods, and incur high cargo insurance costs. Firms
ance if cargo is lost or damaged. are also exposed to risks of missing delivery dates with
The time for goods to clear a terminal is also high consequential fines, shipment value discounts, or
in many countries. In a congested port, a vessel may rejection of the shipment by the customer. These in-
have to anchor offshore awaiting a berth, or ineffi- efficiencies drive up the costs of doing business.
Box 12: Questions to Consider When Assessing Trade Logistics
1. What trade policy issues affect sourcing of raw or inter- 5. Who is responsible for pre-shipment inspection of the out-
mediate material (e.g., preferential trade agreements, bound product? What is the cost?
rules of origin requirements, import tariffs or import bans)? 6. What is the prevalence of illegal/corrupt practices? What
What is the level of import tariffs for key inputs and final are the impacts on the sector?
products? 7. Does the state of physical infrastructure impede the produc-
2. How do trade logistics affect the sector? (Considering that tivity of the sector? How does this affect competitiveness?
just-in-time delivery is critical for competing in world mar- What are the trucking charges ($/km ton)?
kets, this category includes administrative procedures, 8. How often in the last year were shipments delayed? What
customs and technical control processes and other non- is the value of loss as a percent of shipment value?
tariff barriers to trade, such as standards for product qual- 9. How integrated is the order-warehouse-transportation dock
ity and testing, certification processes, etc.) system in terms of lead time, costs, and number of process
3. What is the extent of the informal market for logistical activities? How close is lead time to process time?
services? 10. What is the percentage of defects? How are causes for de-
4. Which non-tariff barriers affect the industry? fects analyzed and traced back through the chain?
• How long does it take to clear exports? 11. Who bears the cost of defects and the costs of disposing
• What are the procedures for clearing shipment? them? How much are these costs?
• How much paperwork is needed? 12. What is the average percentage of returned consignments?
• How many agencies are involved? What is the value of returned goods?
Developing Policy
4
Recommendations
Policies, institutional efficiencies, infrastructure ser- gin will depend on all the costs—raw and interme-
vices, factor costs and quality all affect the total cost diate goods as well as the costs of the primary inputs
structure. These sometimes drive costs up and some- and transport/logistics services. A quick snapshot of
times they drive costs down through subsidies and the industry’s cost competitiveness is the relative
concessions. For example, two government policies size of the wedge between the FOB price and all
affected the performance of Nigerian wax print other costs. A highly competitive industry would
textiles. First, an export expansionary grant (EEG), show a relatively large wedge.
which the government initiated for a limited period In addition to costs, a VCA must consider produc-
of time for promoting non-oil exports, resulted in tivity and the input-conversion ratio, which plays a
rapid growth in cotton exports. This in turn led to a critical role in determining whether a firm (or indus-
scarcity of domestic cotton and increases in raw ma- try) is profitable. Because final prices are determined
terial costs for the textile industry because the indus- by the market, a firm needs to focus on increasing
try had to import cotton. Abuse of the subsidy even- its productivity. The higher the productivity of a sec-
tually forced the government to withdraw the EEG. tor, the lower the costs of production as a propor-
This resulted in tremendous uncertainty and costs for tion of the FOB price, the greater the value added,
many firms that had invested in expanding their op- and potential profits. The latter may lead to rein-
erations to take advantage of the EEG. Second, the vestments in the sector, which could have spillover
government imposed an import ban on foreign tex- effects to the rest of the economy.
tiles, which did nothing to stop illegal imports of Value chain analysis helps to effectively isolate the
Chinese wax print textiles into the region and into binding constraints that affect the sector in a system-
Nigeria on a large scale. These illegal imports forced atic manner. Establishing benchmarks helps to prior-
domestic producer prices down, resulting in the clo- itize the constraints so that targeted solutions can be
sure of several Nigerian factories. formulated. The set of issues that emerge from such
Assuming that a producer in a developing econ- a detailed analysis at a sector level has implications
omy is a “price taker,” the value added and profit mar- for both the public and private sectors alike.
35
Figure 15 Sample Policy Recommendations Framework
Public Sector Private Sector
• Reduce VAT Redemption delays • Private power provision to rationalize cost and/or
enhance performance
Economy Wide
• Risk-based system for profiling tax payers, backed

by an effective post-refund audit system • Private water and sanitation
• Review and/or revise Investment Code to ensure • Privatize air/sea ports
level playing field between SME and large firms
• Improve land registries; clarify titling/leasing or user
rights
• Remove tariff distortions on main imported inputs • Shop floor management enhancements to increase
for the sector productivity
Industry Specific
• Reduce barriers to Import Licenses for key actors in • Diversification of products and/or markets;
the sector
• Improve capacity of suppliers, infrastructure for
• Improve enforcement of product standards sourcing to improve backward linkages
• Policy for attracting FDI (e.g., hotels) • Promotion for attracting FDI in for e.g. hotels, tourism
products
Source: Uma Subramanian (2007).
Some of the issues are sector-specific, and others Example: Tourism in Mozambique
are relevant across an economy and apply to many
sectors and firms in a country. Both the public and Mozambique has a strong comparative advantage in
private sectors must work closely together on some tourism but has so far not been able to exploit its po-
issues if they are to be addressed effectively. A use- tential. In 2000, the Government of Mozambique
ful framework for developing targeted solutions is pre- adopted the “Action Plan for Reduction of Absolute
sented in Figure 15. Along the vertical axis, recom- Poverty” (PARPA) as a medium-term rolling instru-
mendations are divided by whether they address ment incorporated into the public planning process.
economy-wide or sector-specific constraints. Along Tourism was seen as a priority area in which additional
the horizontal axis, solutions that are primarily ad- investment could create the jobs necessary to meet
dressed by public sector agencies are separated from the PARPA objectives. Most developing countries
those that are in the realm of private firms, even have increased their market shares in international
though many solutions require joint public-private ef- tourism; Sub-Saharan Africa in particular has experi-
forts to jumpstart reforms. enced strong growth in tourism within the last two
The World Bank Group has conducted a number decades, increasing its market share of global ar-
of value chain studies, and in one way or another, they rivals from 1.5 percent in 1970 to 4.5 percent by
have led to substantial policy changes. The following 2003.1 Despite its strong tourism asset base and geo-
examples illustrate how the diagnostics of a VCA can graphic proximity to South Africa—one of the world’s
lead to tangible recommendations for policy changes.
These include the tourism sector in Mozambique 1. FIAS and OECD. “The Tourism Sector in Mozambique: A
and the textile sector in Indonesia. Value Chain Analysis.” World Bank Group, March 2006.
C H A P T E R 4 . D E V E L O P I N G P O L I C Y R E C O M M E N D AT I O N S 37
Table 7: Summary Recommendations for the Tourism Sector in Mozambique
Public Policy Private Sector
Economy-Wide 1. Land issues 2. Airport infrastructure

• Clarify land user rights • Improve infrastructure at airports and on key
• Establish a “one-stop” source of accurate links to regional destinations
information and processing of land user rights;
• Clearly delineate the roles of local and central
governments.
Industry-Specific 3. Ease and cost of access 4. Marketing of Mozambique as

• Remove visa requirements for key source prime tourism destination
markets; streamline frointier formalities o • Develop strategy for effective, coordinated
reduce waiting times promotion of the country’s image by domestic
• Revise bilateral air service agreements with tour operators, hotels and airline
EU countries and key African hubs. representatives
• Accelerate implementation of UNIVISA
• Revise policy on charter flights to improve
frequency and flexibility
top tourist destinations—Mozambique trails behind bique study have been selected (see Table 7). By no
all its neighbors except for Malawi. means do these four include all the sector’s short-
Although the country’s tourism sector has grown comings, but they illustrate how public and private
from a very low baseline, at an impressive annual sectors can address economy-wide and industry-
growth rate of 13 percent (1999–2003), the average specific issues. It should be noted that prioritiza-
number of tourists per 100 inhabitants, at 2 for Mozam- tion of the issues went hand in hand with an assess-
bique, is half of Africa’s average, and well below the ment of the feasibility and potential impact of the
world average of 11 per 100 inhabitants. Mozam- proposed solutions. The first two examples apply
bique’s poor performance reflects problems with its economy-wide, while examples three and four are
overall image, product variety, and the quality of tourism sector specific.
tourism experiences. Realizing this potential depends The first finding, which affects the economy as a
substantially on the ability of all players in the Mozam- whole and needs to be addressed by the govern-
bique tourism value chain—from hotel operators, ment, relates to the numerous difficulties with land-
tour operators, hospitality service providers, relevant related issues. Because of the lack of clarity and un-
government agencies—to create and deliver high- certainty with land use rights, the sector cannot
quality tourism experiences that can transform the expand fast enough and the risks associated with
country into a “must see” destination in Africa. FIAS user rights turn off private investors. The recom-
conducted a tourism VCA in Mozambique in 2006 mendations emphasized the need for the government
and formulated targeted policy recommendation to establish clarity in land user rights; establish a
based on its findings. one-stop source for land registration and leases;
The VCA found that the requirements for turning more clearly delineate the roles between local and
Mozambique into a regional tourism destination central governments; and establish early consultative
were extremely high. For the purposes of illustrating mechanisms with the community.
how policy recommendations are formulated from The second major finding identified the difficulty
VCA results, four of the major findings of the Mozam- and high costs of accessing the country from abroad.
There were very limited intercontinental flights from (See Annex 7: Sample Policy Recommendations & Ac-
Europe to Maputo; most countries had flights to tion Plan Matrix: Mozambique Tourism High Priority
Johannesburg, where connecting flights had to be Initiatives.)
taken to Mozambique. While this issue has implica-
tions for the economy as a whole, the tourism sec-
tor in particular was significantly affected. The rec- Example: Textiles in Indonesia
ommendations called for a review of existing bilateral
air service agreements with EU countries by the gov- The textile VCA showed that although Indonesia had
ernment in coordination with the World Bank’s Com- gained a renewed strength in the U.S. market, its com-
munications project.2 In addition, a review of the petitive position was under threat, particularly as a
policy on charters was recommended to enable more result of cut-throat competition from China and
frequent and flexible charter operations. Visa re- India. The project pointed to five key constraints
quirements for tourists from most major source that needed urgent attention if the sector wanted to
countries (excluding South Africa) acted as a deter- maintain its global market position:
rent. A key recommendation was to lower these re-
strictions, making the country a more attractive des- • Low levels of investment in the sector during re-
tination for tourists. cent years resulted in a declining technological pro-
For a reform agenda that had to be driven mainly file and lower productivity.
by the private sector, in partnership with the public • Weaknesses in trade facilitation measures exposed
sector, the VCA pointed to two areas: (i) improve- the industry to rent-seeking activities that could
ments in infrastructure at airports other than Maputo; significantly undermine future growth prospects.
and on key links to destinations in the northern part • Rising energy costs were expected to raise over-
of the country, and (ii) more effective representation all production costs by 5–6 percent. A serious con-
of Mozambique as a prime tourist destination in re- cern was the uncertainty associated with the in-
gional and global tourism markets. There was clear creases in energy costs.
need for better collaboration between foreign and do- • Domestic tariffs and taxes had a negative effect
mestic tour operators; and effective coordination on operational costs (e.g., VAT and duties on im-
among the industry’s stakeholders. Airlines, hotels, ported raw materials). There was a high risk of ex-
tour operators, retailers, restaurants and a whole port losses from trade diversion due to higher av-
range of public sector agencies needed to effectively erage tariffs on textile and apparel products relative
work inter-sectorally to develop, promote, and man- to key competitors in the U.S. and other markets.
age tourism destinations and, more broadly, Mozam- • Low labor productivity and rigid labor market poli-
bique’s image and positioning in world markets. cies were undermining Indonesia’s relative labor
cost advantage in the long run.
2. World Bank (2001), Mozambique Communication Sector Re- The following recommendations were derived
form Project. from the VCA: (Table 8).
C H A P T E R 4 . D E V E L O P I N G P O L I C Y R E C O M M E N D AT I O N S 39
Table 8: Recommendations for the Indonesian Textile Sector
Recommendation Public Private
Improve technology Establish guidelines for accelerated depreciation for tax Explore options for “supplier credits” from Japanese and
and productivity purposes. European equipment makers in discussion with MIGA.
Reduce the impact Improve the transparency of energy pricing policy; Ease access to equipment and technology for alternative
of energy costs publish standardized rates. energy.
Establish a National Textile Energy Efficiency Scheme
(TEES).
Improve labor Principles guiding severance pay system aligned with: Establish a Productivity Improvement Centre possibly
productivity • Good practices associated with textile training center in Bandung,
Indonesia.
• Sustainable deferred compensation schemes (e.g., joint
savings scheme between employer and employee;
reduce the frequency of changes to the minimum wage
and limit government involvement in overtime rates).
Reform the social security scheme.
Reduce the impact of • Eliminate advance income taxes on imported Coherent marketing strategy:
tariff and non-tariff processed materials. • Public–private program
barriers and domestic • Establish a better risk-based taxpayer profiling system
• Target selected markets/buyers
taxes and cost-effective post-refund audit system.
• Funding mechanisms of joint marketing campaigns
• Implement IMF recommendations for VAT
• National branding and image
simplification.
• Reduce VAT refund processing to 10 days (IMF 2006).
• Pay interest on delayed refunds after 30 days of claim.
• Reduce administrative procedures for VAT refund
claims.
• Eliminate the requirement to submit original copies of
invoices.
• Streamline methods for auditing refund claims.
• Reduce information required in VAT return from 175
fields to 17 fields.
• Strengthen the capacity of the tax office, including
the use of third parties.
• Strengthen the central government review team to
improve the scrutiny of nuisance tax, regulations, and
levies imposed by local governments.
• Benchmark administrative barriers and cost of
compliance to regulations at the provincial or local
government level.
Address negative impact of preferential trade
agreements (CAFTA-DR)
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Annexes
1. Acronyms Used in this Report
2. Value Chain Analysis: Policy Questions
3. Value Chain Analysis: Sample Terms of Reference
4. Sample Sourcing Business Survey (Peru Textiles)
5. INCOTERMS
6. Industry Competitiveness Indicators for Value Chain Analysis
7. Sample Policy Recommendations & Action Plan Matrix: Mozambique Tourism

High Priority Initiatives)
45
Annex 1
Acronyms Used in this Report
AGOA African Growth and Opportunity Act

BEE business-enabling environment
CAFTA Central America Free Trade Agreement
CAFTA-DR Central America Free Trade Agreement – including Dominican Republic
EEG export expansionary grant
EU European Union
FAO Food and Agriculture Organization
FIAS Foreign Investment Advisory Service (World Bank Group)
FOB free on board
GDP gross domestic product
GTZ Gesellschaft für Technische Zusammenarbeit
HACCP Hazard Analysis and Critical Control Points
ICA Investment Climate Assessment
IFC International Finance Corporation (World Bank Group)
MIGA Multilateral Investment Guarantee Agency (World Bank Group)
PARPA Government of Mozambique Action Plan for Reduction of Absolute Poverty
ROA return on assets
ROE return on equity
SCOR Supply-Chain Operations Reference
SME small- or medium-sized enterprise
TEU 20-foot equivalent unit
UNIDO United Nations Industrial Development Organization
USAID U.S. Agency for International Development
VAT value-added tax
WBG World Bank Group
WTO World Trade Organization
ANNEXES 47
Annex 2
Value Chain Analysis: Policy Questions
The questions listed below aim to provide practical 9. What types of Corporate Social Responsibility-
policy guidance for practitioners who conduct value related issues (e.g., environmental standards;
chain studies. The questions are applicable to most child labor laws) affect the sector?
manufacturing sectors. Additional questions specific 10. What is the market share trend in key markets?
to an agricultural processing sector appear after the
general policy questions.
II. Competition Policy
I. Trade Policy 11. Does a level playing field exist among producers
and firms (e.g., small vs. large; foreign vs. domes-
1. What are the global/regional trends regarding tic; formal vs. informal) on issues such as:
tariff and non-tariff trade barriers? What is the gen- a. Enforcement of taxes, import tariffs, product
eral level of protection in the industry? standards, etc.
2. What types of regional and international trade b. Access to formal sources of financing (banks)
policies or agreements (e.g., CAFTA, WTO) affect c. Access to key public utilities (e.g., energy)
trade in the sector and in the country? Differen- 12. Why kinds of licensing restrictions exist to limit
tiate between regional and international agree- the number of firms that produce or distribute
ments. raw, intermediate, and final products?
3. What kinds of duties or import tariffs exist for key 13. What kinds of incentives or restrictions exist
inputs such as machinery and equipment? for production units by size (e.g., do small and
4. Does a VAT exist on imported material? What is medium-sized enterprises receive subsidies)?
the average duration for reinstatement of the 14. Who are the new entrants? Who has left the mar-
VAT? ket? Why?
5. Is the industry largely based in export process- 15. What types of licensing restrictions exist for new
ing zones (or special/privileged industrial zones)? entrants?
6. Describe the degree to which these zones are in- 16. What types of criteria exist to allocate transpar-
tegrated with the rest of the economy. ent licenses and permits?
7. Which types of non-tariff barriers affect the
industry?
a. Customs and technical clearance: How long III. Other Policy and Regulatory Issues
does it take to clear imports and exports?
b. What are the procedures for clearing ship- 17. Are there any critical land market issues such as
ments? restrictive zoning laws, administrative barriers, or
c. What amount of paperwork is needed to a lack of clarity in titling that must be considered?
clear shipments? How do they affect the industry?
d. How many agencies are involved in clearing 18. What is the prevalence of illegal/corrupt practices
shipments? and what are their effects on the performance of
8. What product quality standards apply? the sector?
19. What kind of anticorruption laws exist, and how tor in the country? How does this productivity
effective have they been? compare with the average firm in the country?
20. What is the rate of growth of FDI in the sector? 31. How does the capacity utilization of domestics
Do restrictions on FDI affect the sector? What is firms in the industry compare with global and re-
their basis? Are there government incentives for gional best practice?
promoting FDI such as tax breaks and inexpen- 32. How does the technology in the sector com-
sive land? pare with global and regional best practice?
21. What is the share of informal firms in this sector 33. How do the factor costs of labor, capital, and key
in the market? inputs compare with global and regional best
22. Are intellectual property rights adequately estab- practice?
lished and enforced for the industry? 34. With just-in-time delivery being a critical compo-
23. Does the government extend any incentives for nent for competing in world markets, how well
technological upgrading? do logistics services (i.e., customs procedures and
facilities; technical barriers to trade such as stan-
dards for product quality and testing, certifica-
IV. Competitive Advantages tion processes, etc.) perform?
35. What is the typical order-to-delivery cycle time
24. What competitive advantages do major produc- of the industry? How does it differ from that of
ing nations have? How critical are the following competitors?
factors to the industry and the country? 36. What are the key finance issues for the value
a. Location/geography chain (such as the following)?
b. Infrastructure (roads, ports, airports, telecom- a. Capital market regulation/access to finance
munications, power, water) issues
c. Labor skills b. The banking system
d. Low factor costs c. Collaterals
e. Technology d. Creditors’ rights
25. What is the structure of the market? e. Informal sources of financing
26. Does the sector serve a niche market? f. Trade financing available from foreign sources
27. Does the state of physical infrastructure and util- g. Interest rate
ities impede the productivity of the sector? How 37. What are the inventory holding costs? What part
does this affect competitiveness? of the inventory holding costs are due to firm in-
efficiency versus policy and market factors out-
side a firm’s control?
V. Performance Measures 38. What percent of inputs (i.e., raw materials) to the
industry is imported? How do the price and qual-
28. What international benchmarks does the indus- ity of imports compare with domestic raw or in-
try use? termediate material?
29. How does the productivity of labor, capital, and a. What kinds of protective measures exist on
key inputs of national firms in the sector com- imports such as tariffs/duties/bans?
pare with global and regional best practice? b. What kinds of enforcement of product qual-
30. How does the productivity of labor, capital, and ity standards exist in the country?
key inputs of the average firm differ from the firms c. What kinds of policy restrictions exist on do-
considered to have the best practices in the sec- mestic production of this material?
ANNEXES 49
39. What kinds of unique labor market regulation af- in key external markets (e.g., breaded shrimp in-
fect sector productivity? stead of frozen; roasted coffee instead of green)?
If not, why not?
a. What types of tariffs are imposed by the
VI. Additional Questions for an Agricultural United States, European Union, or other
Processing Sector trade partners on higher value products?
b. Are higher standards required?
1. Are the food quality standards on par with inter- c. Is it difficult to establish market credibility for
national standards? Is there a problem with en- the higher value products?
forcement of standards? d. Is there an absence of adequate processing
2. Is there a difference or difficulty in enforcing facilities for higher value-added processing?
standards on small producers? 10. What issues, such as those below, are associated
3. How qualified and capable are quality certifica- with sourcing raw or semiprocessed agricultural
tion laboratories and processes? products?
4. How many exporting firms in the sector are cer- a. Poor road links
tified exporting firms (e.g., HACCP, EureGAP, b. Inadequate or unreliable transport services
etc.)? c. Inadequate or absent cooling chains, ware-
5. What is the frequency with which the sector houses, etc.
products fail inspection tests in importing coun- d. Poor-quality supplies
tries? What is the frequency of rejections? e. Reliability of supplies
6. What types of inspections do agricultural prod- f. Inadequate supplies
ucts undergo in key import countries? 11. What is the marketing channel for the agricultur-
7. Were any alerts released in the last quarter or ally processed product?
year by the regulatory authorities of importing a. Sell to government board/body
countries? b. Auction
8. What types of subsector policy issues (e.g., high c. Private brokers
prices for fertilizers or pesticides) exist in the agri- d. Retail chains
cultural sector? Why do they exist? e. Other
a. What types of tariffs exist on imported in- 12. Is this sector part of the government’s export de-
puts? velopment strategy? What is the strategy?
b. Do transport logistics costs add to import 13. How effective are the agricultural industry asso-
costs? ciations in lobbying for change in the sector?
c. Is there a lack of competition among quality 14. What is the structure of intermediaries between
producers in the domestic market? Why? local small agricultural producers and proces-
9. Would producers in Country X be able to sell sors (e.g., cooperatives, traders, brokers, consol-
processed products with a higher added value idators, etc.)?
Annex 3
Product Value Chain Analysis: Sample Terms of Reference 1
This is a generic terms of reference, designed as a developing a coherent economic growth develop-
guide for outlining the basic scope of work and re- ment strategy. To this end, the study’s objectives are
search activities necessary for a team of consultants as follows:
to assess the performance of firms or farmers in-
volved in the production and export of tradable agri- • Develop public and private awareness and consen-
cultural products (e.g., coffee, cotton, apparel, shrimp) sus on the range, importance, and impact of mar-
using a value chain analytical framework. Consul- ket and policy constraints that limit the growth of
tants would be expected to apply this framework as businesses in the country.
a means for identifying, assessing, and prioritizing con- • Assess and document the performance of local in-
straints; as well as remedial measures and cross- dustries involved the value chain of the product
cutting policy reforms that would most likely en- (e.g., farmers and producers of final and interme-
hance the growth and competitiveness of an economy. diate goods, such as processors, input suppliers,
The terms of reference are designed for a single freight forwarders, transporters, and so on) rela-
consultant or a team of consultants with expertise and tive to global competitors.
knowledge of the following: • Identify the underlying policy, institutional, and in-
frastructural issues that affect the competitive-
• Value chain analytical and benchmarking tech- ness of private sector activity in the country, and
niques relevant to the industry establish priorities for which public sector inter-
• Trade, economic, and industrial policies relevant ventions might have the greatest positive impact.
to both product and service sectors in the coun-
• Identify actions the private sector can take to im-
try under review
prove domestic productivity, expand its market
• Global industry trends, practices, and business
share, reduce costs, increase competitiveness, and
management strategies relevant in various seg-
add local value along the supply chain for the
ments of the tradable product(s) in the country
product.
• Examine the challenges and opportunities for in-
Ideally, consultants should have expertise in value
creasing access to and shares of global and re-
chain analysis, the sector to be assessed, and have the
gional import and export markets for the product
ability to gather data, perform surveys, and other
and associated inputs.
research.
Scope of Work
Objectives of the Study
The consulting team should provide adequate an-
The purpose of the study is to elicit recommendations
swers to broad questions such as the following:
to improve the business environment in Country X
in a manner that enhances competitiveness, growth,
• Which segments of the product value chain are
employment, and business opportunities. The study
should provide input that will serve as the basis for competitive, and which ones are not?
• Which externalities, disconnections, and efficien-
1. The estimated average costs for one industry value chain cies in one segment of the product value chain
is roughly US$50,000 including consultants’ costs. have significantly affected performance in other
ANNEXES 51
segments of the chain, thereby undermining the concerns, changing consumption patterns,
growth of the entire industry? changing climatic conditions, and so on).
• Which institutional and policy interventions have Benchmark these data points with competing
strengthened the competitiveness of various seg- countries, and regional and global averages.
ments of the chain, and which ones have under- • An analysis of global, regional, and national
mined it? Which policy and infrastructure inade- product and industry trends, including key
quacies currently impede efficient and effective export and import markets, market shares;
input sourcing, production, and transformation of changes in sourcing, production, and supply
value and delivery of the products that can be chain management practices; standards and
traded to domestic or foreign consumers? technological practices; and so on. Identify key
• What other types of underlying factors limit the drivers of the demand for the product, and spe-
ability of local firms to directly contribute to the cific factors required for local producers to com-
product chain? Are there specific factors that limit pete in each of these markets, including, prod-
the benefits (or rents) within the value chain, and uct quality or required processing standards.
to the local community? • An assessment of the relationship between
• What public-private remedial measures should be product sector contributions and broader
taken to improve domestic productivity, reduce macroeconomic indicators (e.g., national and
costs, and strengthen the ability to add local value provincial GDP, inflation, employment, foreign
throughout the chain? What remedial measures exchange, tax revenues, and so on). This should
need to be implemented to strengthen the integra- include a review and synthesis of the policy
tion of the domestic private sector with the regional and administrative framework governing each
and global supply chains where applicable? product. Completing this task will require a re-
view of other analytical and policy studies cov-
As part of this analysis, the consultant (or team) ering investment climate, trade and transport,
should complete the following tasks: and so on (e.g., investment climate assessment,
Doing Business indicators, FIAS administrative
Task 1: Analyze the market by compiling a barriers studies, and so on).
comprehensive profile of the products, • A brief discussion of the existing market struc-
associated industries, and markets ture (competition policy) and entry barriers, if
any. It should also include competitive dynam-
1. Present a brief product and industry profile that ics of core service providers linked to the prod-
should include (but not be limited to) the fol- uct value chain including profiles of economic
lowing items: agents (e.g., input suppliers or producers, core
producers and intermediaries, transporters and
• Global, regional, and national market, produc- freight forwarders, and so on).
tion, and trade data to assess the structure of
global, regional, and local demand, produc- 2. This phase should also include a good stock-
tion, output, trade volume and values, con- taking of all previous relevant studies or projects
sumption patterns, input and output prices, (both completed and ongoing) and a gap analy-
and so on. sis to clearly identify the added value of the cur-
• A discussion of the global external shocks that rent project in specific terms. By the end of this
are likely to influence the export performance phase, the team should already have identified
of the products or sector (e.g., changing global broad key issues that affect the sector. The task
policies such as phasing out the Multifiber team leader and team must work closely together
Agreement (MFA), rising fuel and energy prices, at this phase before the first mission trip is
the prevalence of global terrorism and security launched.
Task 2: Value Chain Analysis some customs procedures and facilities, technical
barriers to trade, etc.).
The value chain analysis will include: • Identifying underlying sector-specific factors that
are causing poor performance along the value
• Value chain mapping (i.e., separating the product chain (e.g., standards for product quality and test-
value/supply chain into its major value-added ac- ing, certification processes, sector policy distor-
tivities or segments). For each identified product tions, administrative procedures, skills, access to
or sector the consultant should characterize the capital equipment, access to capital, tax structure,
product market to include sources of raw mate- and licensing).
rials, buyers, mechanisms for information flow • Establishing monetary costs of policy interven-
within the value chain, and key supporting ser- tions/regulations (i.e., the costs of compliance
vices (energy, transportation, etc.). and hidden/informal costs of compliance such as
• A measurement of the product value chain per- the cost of internal resources used by each com-
formance, which includes the following steps: pany to comply).
! Provide estimates of cost, time, and added value • Identifying good practice cases to support the
of sourcing, transforming, and delivering raw recommendations to address the issues.
materials within one segment (or process) of the • Analyzing the institutional and policy linkages be-
chain to another. tween the performance of the value chain and
! Benchmark the indicators in the point against specific policies, regulations, and institutions orig-
those of competing countries involved in the pro- inating from either the public or private sectors.
duction and delivery of similar products. Consultants may identify which specific institu-
! Identify key segments and activities within the tional and policy measures would help to enhance
chain where performance lags behind those of the private sector’s ability to improve the per-
competing countries/industries. formance of the value chain. Implications of these
! Prioritize segments and activities in the chain policy measures should be discussed and sup-
where poor performance or inefficiencies se- ported by evidence drawn from the value chain
verely undermine the competitiveness of the analysis and from international good practices. A
entire value chain. summary of these issues and their implications
could be presented in a matrix that highlights
Task 3: Identify key policies, regulatory, their effects on supply-chain competitiveness.
and institutional constraints to the
performance of the value chain and To the extent possible, the consultant (or team)
identify appropriate solutions should also provide some sensitivity analysis of the
effect these constraints have on key economic devel-
Drawing on the value chain and benchmarking analy- opment objectives (e.g., how can the amount of
sis in Task 2, the consultant team should identify local added value and income generation be in-
key policy and market factors that will improve the creased; what are the prevailing attitudes toward in-
competitiveness of a specific industry, as well as vestment and risk-taking, safety and security, and
those that undermine it. These tasks might include working conditions?).
the following: Finally, based on the findings of the study, the
consultant should offer recommendations for World
• Identifying cross-cutting/economy-wide bottle- Bank Group support for policy and institutional
necks that affect the capacity of the private sector measures that would improve productivity and per-
to compete (e.g., a lack of infrastructure, cumber- formance along the value chain.
ANNEXES 53
Key Milestones, Deliverables, • A workshop will be held in the country to discuss

and a Time Frame the findings and fine-tune the recommendations.
• The consultant team should finish its report by XX.
• Desk research might include (i) taking stock of This should be in the form of a manuscript that can
studies or projects and identifying a scope of work be published with a length of approximately X
and (ii) market analysis. This should be completed pages, not including annexes, and statistical and
before the first mission trip occurs. Consultant other tables. The report should draw conclusions
should submit an inception report containing a re- about the current status of laws, regulations, ca-
search on points (i) and (ii). pacities, and programs designed for developing the
• The first mission trip should include field work to sector in the country; it should identify areas that
collect data for the value chain analysis and a pre- need priority attention; and it should recommend
liminary analysis of issues. key steps the government, private organizations,
• First draft to be submitted by XX. and international development agencies should
• The second mission trip will involve completing take. Reference should be made to the appropri-
field work and filling data gaps. It should focus on ate contexts for such efforts—whether at the na-
analyzing the underlying policy, institutional, and tional level, at the regional level, or in relation to
other constraints affecting the competitiveness international organizations and forums.
of the product value chain.
• Second draft report to be submitted by XX. The consultant team will report on this study to XX
• Following review and feedback by the task team managers.
and the peer review committee, a draft of the final
report should be delivered by XX.
Annex 4
Sample Sourcing Business Survey (Peru Textiles)1
Objective: To gauge the importance of different factors in investment and sourcing decisions of textile and apparel
companies
Interview target: Sourcing managers from large international textile and apparel buyers
A. INTERVIEWEE PROFILE
Company name:
Company type (retailer, licensee,

distributor, other [please describe]):
Contact name:
Contact e-mail address:
Contact phone number:
Home country of company:
Private or publicly owned company:
Annual revenue:
1. Used in the Peru Textile Value Chain Study, FIAS, 2007.

ANNEXES 55
1. For each of the following countries, please answer the questions on the left.
CBI
Pakis- Bangla- Other (Caribbean
China Mexico India tan desh SE Asia Basin) Peru Other
Do you currently
source from this
country? Yes/No
What percent of
total global
purchasing does
this country
represent?
Has this changed

in the last 3 years?
By what percent
has it increased
or decreased?
Do you plan to
expand operations
in this country in
the near future
(Yes, No, Year)?
Do you source
a major product
(>15% of sourcing)
from this country?
(Yes, No, please
name product.)
B. INVESTMENT AND SOURCING DECISIONS

2. If your decision to contract a new supplier is based on country of origin, please mark with an X how important the
following criteria are for your sourcing decisions.
IMPORTANCE
1 2 3 4 5
Not Slightly Fairly Very
CRITERIA Important Important Important Important Important
Political and economic stability
Labor cost
Workforce skill
Workforce productivity
Geographic proximity to markets
Trade agreements
Corruption
Social and environmental

standards and practices
Government regulation and

administration (bureaucracy)
3. Rate the performance of the average factory in each country for the factors below on a scale of 1 (“very poor”) to
5 (“excellent”). If you are unfamiliar with the performance of any of these countries, write NF (not familiar).
CBI
Pakis- Bangla- Other (Caribbean
Factor China Mexico India tan desh SE Asia Basin) Peru Other
High workforce skills

Low cost of production other
than labor
High workforce productivity
Low labor cost
High product quality
Fast speed-to-market
Sophisticated level of services
(i.e., full package)
High social and environmental
compliance
Product mix
Low average defect rate
Short order-to-delivery cycle time
High flexibility in size and scale
4. Mark with an X which of the following issues (if any) have caused your company to take any of the described actions:
Action
Withdraw from
Choose one Withdraw from a country
supplier/ a supplier/ (specify if it
business business Choose one was a Latin
partner over partner over country over American
Issue of Concern another another another country)
High workforce skills

Low cost of production other than labor
High workforce productivity
Low labor cost
High product quality
Fast speed-to-market
Sophisticated level of services (i.e., full package)
High social and environmental compliance
Product mix
Low average defect rate
Short order-to-delivery cycle time
High flexibility in size and scale
ANNEXES 57
5. What are the mechanisms to contract a new supplier? How long does it take?
6. What type of contracts do you usually have with your suppliers? How long do these take to implement?
7. Which countries are Peru’s main competitors? How does Peru rate against competitors or key international ex-
porters such as China, Mexico, India, Pakistan, Bangladesh, other Southeast Asian countries, Caribbean basin coun-
tries, and other countries?
8. How do you assess quality and outside standards?
a. International standards, ISO 14000
b. Other metrics (please specify).
9. What is your policy on defective products/low-quality products?
a. Return entire order
b. Return partial order
c. Discount price
d. Other
10. What is your policy on delayed delivery?
a. Return entire order
b. Return partial order
c, Discount price
d. Other
C. PERUVIAN INDUSTRY QUESTIONS
11. How many factories do you work with in Peru?
Large (>500 Medium SMEs

workers) (100–500 workers) (<100 workers)
Number of factories
Increased/decreased/stayed
the same during the last 5 years?
12. What type of products are you currently buying from Peru? Please state SITC codes.
Currently buying
from Peru (Yes/No) SITC codes
Raw cotton
Yarn
Woven fabric
Knotted fabric
Apparel:
—Women’s
—Men’s
—Children’s
—Other
13. Which countries do you consider to be Peru’s biggest competitors for the following products?
Overall satisfaction (scale 1–10)

Competitor
as a supplier with: Peru vs. Competitor(s)
country
(countries) Peru Competitor(s) Positives Negatives
Cotton
Yarn
Fabric—woven
Fabric—knitted
Apparel—T-shirt
Apparel—Men’s shirt
Apparel—Women’s blouse
14. What is the average defect rate from the average factory in Peru?
In your sourcing experience, what is the average defect rate from all your source countries?
15. Describe the level of integration with your suppliers, and Peruvian suppliers in particular. Do you provide any of
the following?
Overall Peru
Technical support
Credit
Training
Fabric, inputs, accessories
R&D support
Design
Other
16. What are other weaknesses in the Peruvian industry?

17. Do you have any suggestions for how Peru can improve its performance?
18. What have been your experiences in sourcing from SMEs in Peru (key challenges might include labor issues, qual-
ity, timeliness, informality, other)?
a. Are these issues specific to Peruvian SMEs or similar to other countries (Yes/No)?
b. What specific steps could be taken in Peru to make it easier/more efficient for you to source from SMEs in the
country?
19. How would you describe Peru’s textile/apparel industry in one sentence?
ANNEXES 59
B. INTERNATIONAL TEXTILE AND APPAREL CONTEXT

20. Do you think the international market for textile and apparel is changing? How?
• What are the key changes in supply, demand, and prices?
• Do you think the expiration of the safeguards against China in 2008 will change this picture? If so, how?
21. How are these trends affecting your purchasing decisions? Do you look for new markets you did not con-
sider before? How is the growing presence of China in the market affecting your buying conduct?
22. Specify how trade agreements are affecting your sourcing patterns.
23. Do you think countries are specializing in different segments of the industry (i.e., profiling themselves as
a specific kind of supplier)? Specify which countries and their specialty.
Annex 5
INCOTERMS
Origin Terms CIP: Carriage and Insurance Paid To, named place or
port of destination.
EXW: Ex-Works, named place where shipment is This term is used for air or ocean containerized
available to the buyer, not loaded. The seller will not and roll-on roll-off shipments.
contract for any transportation.
Arrival at Stated Destination
International Carriage NOT Paid by Seller
DAF: Delivered At Frontier, named place of destina-
FCA: Free Carrier, unloaded at the seller’s dock OR tion, by land, not unloaded.
a named place where shipment is available to the in- This term is used for any mode of transportation
ternational carrier or agent, not loaded. This term can but must be delivered by land.
be used for any mode of transport.
DES: Delivered Ex-Ship, named port of destination,
FAS: Free Alongside Ship, named ocean port of ship- not unloaded. This term is used for ocean shipments
ment. (Ocean shipments that are NOT containerized.) only.
FOB: Free On Board vessel, named ocean port of DEQ: Delivered Ex-Quay, named port of destina-
shipment. This term is used for ocean shipments tion, unloaded, not cleared.
only where it is important that the goods pass the This term is used for ocean shipments only.
ship’s rail.
DDU: Delivered Duty Unpaid, named place of des-
International Carriage Paid by the Seller tination, not unloaded, not cleared.
This term is used for any mode of transportation.
CFR: Cost and Freight, named ocean port of
destination. DDP: Delivered Duty Paid, named place of destina-
This term is used for ocean shipments that are not tion, not unloaded, cleared.
containerized. This term is used for any mode of transportation.
CIF: Cost, Insurance and Freight, named ocean port Incoterms 2000
of destination.
This term is used for ocean shipments that are not The following chart summarizes the responsibilities
containerized. of both the buyer and seller for each of the current
13 INCOTERMS.
CPT: Carriage Paid To, named place or port of
destination.
This term is used for air or ocean containerized
and roll-on roll-off shipments.
EXW FCA FAS FOB CFR CIF CPT CIP DAF DES DEQ DDU DDP
Carriage Delivered
Free Free Cost Carriage Insurance Delivered Delivered Ex Quay Delivered Delivered
Ex Free Alongside Onboard Cost & Insurance Paid Paid At Ex Duty Duty Duty
SERVICES Works Carrier Ship Vessel Freight & Freight To To Frontier Ship Unpaid Unpaid Paid
Warehouse Storage Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Warehouse Labor Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Export Packing Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Loading Charges Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Inland Freight Buyer Buyer/ Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Seller*
Terminal Charges Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Forwarder’s Fees Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller
Loading On Vessel Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Ocean/Air Freight Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller
Charges On Arrival
At Destination Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller Buyer Buyer Seller Seller Seller
Duty, Taxes &
Customs Clearance Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller
Delivery To Destination Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller
* There are actually two FCA terms: FCA Seller’s Premises where the seller is responsible only for loading the goods and not responsible for inland freight; and FCA Named Place (International Carrier) where the seller is respon-
sible for inland freight.
ANNEXES
61
Annex 6
Industry Competitiveness Indicators for Value Chain Analysis
1. Inputs 5. Product Quality

a. Cost of key inputs (raw and intermediate) a. Number of rapid alerts
b. Tariff on main imported inputs b. Defect rate
c. Input conversion ratio c. Percentage share of exports
d. Import dependency ratio d. Number of certified exporting firms/total
e. Time to import (Doing Business Indicators) exporting firms (or total producing firms)
f. Cost to Import (Doing Business Indicators)
6. Market Access
2. Factor of Prouction a. Order to delivery time (days/weeks)
a. Wage/labor hour b. Tariff in key export markets
b. Hiring/firing rigidities (Doing Business c. Time and cost to export (Doing Business
Indicators) Indicators)
c. Interest rate (long-term and working capital) d. Trade openness index
d. Getting credit (Doing Business Indicators)
e. Rate of return on capital 7. Business Environment
f. Cost and time to lease industrial land a. Enforcing contracts (Doing Business
g. Cost and time to purchase industrial land Indicators)
b. Entry barriers (Doing Business Indicators)
3. Utilities c. Registering property (Doing Business-
a. Electricity cost (US$/kwh) Indicators)
b. Water cost (US$/cubic meter) d. Protecting investors (Doing Business
c. Telecommunication cost (3-minute local Indicators)
call) and % of firms using the Internet to e. Licenses
interact with clients f. Senior management time spent on red tape
d. Power outage (days) and % of sales lost (Enterprise Survey)
(Enterprise Survey) g. Paying taxes (Doing Business Indicators)
e. Number of days to get telephone connection
4. Productivity
a. Value added per worker
b. Output produced per labor hour
c. Yield per hectare
d. Value added per unit of investment
e. FDI per value added
f. Average production cost per unit
ANNEXES 63
Annex 7
Sample Policy Recommendations & Action Plan Matrix:
Mozambique Tourism High Priority Initiatives
Responsibility/ Monitoring
Action Coordination Time Frame Indicators
1. Ease and Costs of Access into Mozambique

• Provide and publicize clear information for visitors of entry/exit MITUR; Customs; Short- No. of nationalities of key
requirements and train immigration and airport staff to under- Ministry of Foreign Medium source markets with visa
stand how to handle tourist expectations at entry/exit points. Affairs Term exemptions
• Remove visa requirement for major source markets, and stream- Publications produced,
line frontier formalities (entry/exit) to reduce waiting times at printed and readily
borders Also strengthen border processing capacity and available at entry points
intensify negotiations on one-stop border posts with South No. of hours it takes to
Africa and other selected transport corridors around the country. pass through border posts
• Accelerate implementation of UNIVISA No. of days/hours it takes
• Also mechanisms to enable tour operators to pre-arrange visa for nationals of key source
and entry permits should be established. markets to obtain visas
• Establish payment system and modalities to allow foreign Airport Authority, Civil Short- No. of domestic airline
travel agents and operators to issue air tickets, and access Aviation Authority, Medium tickets sold by tour
airline seat inventories Ministry of Transport, term operators
• Revisit bilateral air service agreements with the EU countries Airlines No. of back-to-back
and key hubs in Africa (particularly South Africa) to facilitate Coordinate with World charter operations
higher capacity and flexibility for direct flights to Maputo, Bank Communications conducted by charter
Vilanculos, and Pemba. Also revise policy on charters to allow Project air transport airlines
for more frequent/flexible back-to-back operations component No. hours taken to clear
• Review airport policies and establish monitoring systems at customs in airport
airports to measure performance and progress in service quality No. of baggage lost
improvements e.g. customs, immigration, delays, baggage- complaints filed
related complaints. Carry out detailed audit and assessment of
Airport capacity to handle
airport infrastructure improvement needs, starting with
larger aircraft
extension of runway and night flying equipment in Vilanculos
• Examine and resolve issues that originate from key regional
connection points to Mozambique—particularly Johannesburg
airport which is the source of many lost/stolen baggage, slow
processing of insurance claims, and so on.
2. Improve Availability & Quality of Hotels, Tour Operators and Other Hospitality Services
• Provide investors in hotels and other establishments with a one- MITUR, with Inter- Medium Guidelines issued and
stop source of accurate information and processing of user ministerial Committee, Term regulations in effect.
rights on land, with clear delineation of roles and responsi- Provincial governments No. of days taken to
bilities between the different levels of government. Also (relevant departments). secure a Duat
promote a pro-active system of community-driven preparation of Ministry of Planning.
No. of disputes resolved
land for tourism based investment and activities. Here, all land PEP Africa’s Tourism between investors and
issues are dealt with, before hand, by the community itself, Anchor project (guide- communities
prior to the investor’s bid for such tourism assets lines for procedures to
No. of days taken to
secure land use rights)
resolve disputes on user
technical assistance to
rights on land
streamline administra-
tive procedures)
(Table continues next page)

Sample Policy Recommendations & Action Plan Matrix: Mozambique Tourism High Priority
Initiatives—continued
• Develop industry codes of practice and a functioning accredita- MITUR with INNOQ, Short- No. of accredited tour
tion system for tour operators and related hospitality PoDE, Hotels asso- Medium operators and hospitality
businesses (tour guides, divers, translators, airport taxis). ciation, Tour Operator Term service providers
Establish a system to benchmark firm performance, and reward association and, other No. of beneficiaries of
high performing firms within each industry. relevant Industry international exchange
• Establish a systematic skills development program for tourism Associations; Hotel programs
industry: Andalucia
Increased tourist
! Augment curriculum and improve training in the Hotel Coordinate with the satisfaction
Andalusia and Technical and Vocational Education and USAID ARC project in
Training programs under the TVET project Cabo Delgado
! Training programs including staff exchange, between
emerging Mozambique hospitality service providers (e.g.
divers, tour operators, travel agents, hotel staff and middle
management, handicraft etc) and their counterparts in key
source/competing markets
! Increase level of private sector input and involvement in
strategic decision making (e.g. at Board level) in these
institutions.
• Streamline administrative procedures—particularly licensing MITUR PoDE with Medium No. of days it takes to
requirements and business start-up procedures for hospitality Ministry of Commerce Term secure business licenses
firms including: tour operators, taxi companies, and other Upcoming FIAS-PEP No. and magnitude of
ancillary service providers (restaurants and entertainment Africa project penalties against non-
facilities) servicing the tourism industry. Also implement clear performing license owners
Coordinate with USAID
penalties to discourage license hoarding
and World Bank TFCA
project
3. Marketing, Product Development and Maintenance of Tourism Assets

• Establish responsibility for restoring, maintaining and MITUR with Ministry of Medium Terms of Reference.
marketing key existing tourism assets (e.g. the coastal Education and Culture Term Action plan with clear
resources, Elephant Reserve, Ilha da Moçambique, Ethnology responsibilities
Museum, etc.). Develop a sustainable financing plan for
restoration and maintenance activities. Start with the Elephant
Park and Ponto d’Oro.
• Privatize the management of the Maputo Convention Center to Ministry of Foreign Short- Percentage monthly
improve visibility, revenue and capacity utilization. Set up a Affairs, Maputo Medium capacity utilization of
destination marketing organization that will promote tourism Convention Center; Term conference facilities
(including MICE tourism) in Maputo Min. of Tourism, No. of events (domestic
versus international)
No. of total guests per
month (domestic versus
international)
Revenues per month
ANNEXES 65
• Develop a coherent short-medium term strategy for tourism CPI Hotel Association Short- Adoption of an interim
marketing CTA MITUR or FUTUR, Medium strategy with a one-year
! Pursue more aggressive joint marketing and collaboration Tour Operators Term action program
between Mozambique and South Africa in order to leverage Coordinate with KfW Percentage of increased
expected increases in tourists’ visits due to the upcoming funded marketing plans government expenditure
2010 World Cup Championship for Inhambane on marketing
! Involve private sector actors along the value chain e.g. hotel Percentage of increased
and tour operators; tour guides, airlines in marketing private expenditure in
Mozambique as destination marketing (by typology of
! Define tourism image, and key source markets other than tourism business/firm)
current sources No. of tourists
! Update and manage distribution of promotional material on No. of tour packages sold
the country, including maps, schedules of events and country
data, post cards, and so on,
! Effective participation in world travel market events promote
e-tourism and on-line destination marketing techniques such
as World Hotel link.com.
! Develop joint public-private funding mechanisms for
marketing
Improving Institutional Focus and Co-ordination

• Intensify use of inter-ministerial committee to address key MITUR, Inter- Short- No. of tourism-related
tourism industry issues such as: ministerial Committee Medium issues addressed and
! air transport issues with Civil Aviation Authority, Term resolved by the committee
! visa issues with Foreign Affairs Ministry, Clear cut difference in
performance measures for
! managing tourism assets (e.g. infrastructure, public works,
FUTUR, DINATUR, and
urban and city transport development)
MITUR
! review responsibilities for tourism development and
marketing between MITUR, DINATUR, CPI and FUTUR to
eliminate overlapping roles and activities.
ACTION PLAN MATRIX—Other Areas Needing Attention
Reduce Difficulty and Cost of Access

• Complete implementation of 5th freedom rights for neighboring Ministry of Foreign Medium- No. of airlines taking
African countries in line Yamoussoukro Declaration and SADC Affairs; MITUR and Long advantage of 5th freedom
Protocol agreements Department of Civil Term rights within the region
Aviation No. of route points served
Coordinate with World by different airlines
Bank Communications Regional air fares
Project air transport
component
(Table continues next page)

• Prioritize road investment program to consider need for Public Works/ Highway Short- Percentage increase in
improved road networks in the North, through strategic Department, Ministry of Medium expenditure for road
selection of O/ D points. Also improve road maintenance, Transport. MITUR Term maintenance activities
signage and accessibility to key tourism assets (e.g. in Maputo Percentage increase in
Elephant Reserve) kilometer roads networks
effectively maintained.
No. of tourism assets per
Km2 with easy and
adequate road access
Strengthen Destination Management and Product Development in Provinces

• Explore integrated tourism development zones as pilots that Local municipalities in Medium Integrated plan
can be replicated. This should begin with the preparation of consultation with term
integrated provincial tourism development plans starting with private sector, MITUR,
Maputo and the Pemba- Quirimbas region to address physical Ministry of
infrastructure development issues including zoning; land use Environmental
standards, ceilings for carrying capacity. The plans should also Coordination (MICOA),
include contingency arrangements to mitigate the damaging Ministry of Land and
impact of natural occurrences (e.g. cyclones, mobile sand Urban Development.
dunes, hurricanes) on key tourism assets. Integrated Coordinate with the Short- Natural disaster
Development Plans are already underway for Vilanculos. World Bank TFCA Medium management plan
• Develop clear national guidelines, modalities and standards for projects tourism Term Guidelines for
cleaning up waste associated with natural occurrences (e.g. component; and with negotiations with
floods, hurricanes) that damage the aesthetic/physical value of the DANIDA funded community and legal
tourism assets (e.g. beaches). coastal zone manage- codes governing
• Create appropriate institutional and legal framework for ment project with contractual relations.
resolving disputes between community and investors, with MICOA in Vilankulos.
respect to land use rights, compensation, and other
agreements. Develop guidelines for investor interaction with
community in Priority Areas for Tourism Development (PATIs)
and Trans-frontier Conservation Areas (TFCAs).
Improve Tourism Revenue Management and Data Gathering

• Establish a monitoring framework geared towards tourism Ministry of Finance; Medium Published data.
satellite accounting that would make tracking and MITUR, Hotel Associa- Term Total tax revenues and
disbursement of tourism taxes and revenue transfers to be tion, Provincial Heads disbursement of revenues.
more transparent and effective. Particular attention should be and Local Chiefs, MOF
Action plan to redress any
paid to strengthening the collection of tourism statistics from
inefficiencies and
peripheral provinces to facilitate more effective policy making.
inadequacies in data
collection.
ANNEXES 67
Strengthen Overall Safety and Environmental Standards
in the Industry
• Promote the adoption of appropriate international standards INNOQ with PODE, Medium No. of certified tourism-
(e.g. ISO 7000 for management, ISO 14000 for management MITUR, Department of Term related businesses for
environmental compliance, and others such as food safety and Civil Aviation, Airlines each respective standards
security. Develop food safety and quality standards and (LAM), Airport (e.g. ISO14000)
training compliance program for local food producers to meet Operators
standards and quality requirement of supermarkets, and hotel
chains. Review and monitor compliance with international
aviation safety standards
• Establish industry benchmarking system to monitor operational
and competitive performance of the hotel industry relative to
competing countries.
Increase Investment and Local Value Added

• Review the Investment Code to ensure a level playing field CPI and Min of Finance Short No. of tourism businesses
between large and small hospitality establishments. Extend the Term taking advantage of
benefits of the investment code to other stakeholders in the investment code benefits
tourism value chain (e.g. tour operators and ancillary service No. increased level of
providers—restaurants) domestic investments
• More effective use of PoDE’s investment outreach program flows due to investment
code incentives
• Revise taxes, tariffs and duties on imported equipment, Min of Finance, Medium Percentage of taxes and
machinery, food and drinks and refurbished vehicles that are Ministry of Industry and term duties reduced by product
important to quality of service in the tourism industry Trade group
Percentage change in
import prices of key
tourism related input
products
Percentage change in
quantity of imported
tourism inputs due to
revised taxes, duties and
tariffs
• Develop small scale financing and technical support for SMEs PODE; PEP Africa Short Revenues from handicrafts
in handicrafts and other ancillary services term and ancillary services
(from tourist expenditure
surveys)

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Moving Toward Competitiveness:

A Value Chain Approach

FIAS: The Foreign Investment Advisory Service

All rights reserved

Available online at www.fias.net

Chapter 2: Value Chain Analysis—the Key Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Chapter 3: Measuring Performance and Establishing Benchmarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Chapter 4: Developing Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

3. In addition to WBG units, many other international devel-

Figure 1 Sample Policy Recommendations Framework

Public Sector Private Sector

• Risk-based system for profiling tax payers, backed

Source: Uma Subramanian (2007).

Figure 2 Example of Potential Implementation Projects following

ADVISORY AND INVESTMENT PROJECTS

• Industry Specific Licensing • Trade Policy (tariffs, agreements)

Figure 4 Shrimp Trawling Value Chain for Nigeria

Pre-Voyage Processing Storage &

Steps include: Steps include: Steps include:

Figure 5 Shrimp Value Added and Shipment Value Breakdown

Source: Yee and Paludetto (2005).

19. Please see Chapter 3, Tables 5 and 6 for a detailed list of

Figure 6 Extended Value Chain of Cattle Industry

Source Make Deliver

Source Make Deliver Source Make Deliver

Cattle Leather Shoes

Policy Institutions Infrastructure

Figure 7 Key Elements of Value Chain Studies

International & Government failures

Market Analysis 12. Enforcement of property rights and regulations

Box 1: Sample Market Analysis Questions

Box 2: Sample Questions for Buyers

Box 3: Sample Questions for a Mapping Exercise

1. What is the “cradle to grave” process map of the industry?

Figure 8 Value Chain Mapping of Activities: Coffee in Honduras

Direct sale to Wholesalers or Retailers

• Fencing (for fertilization • First • Storage • Toasting

Source: World Bank Group (2005d), Honduras Coffee Value Chain.

Figure 9 Honduran Coffee Value Chain Dynamics: Structure of Industry

+ High Number of Participants Low –

Wet Mill Broker / Domestic

Restaurants / Regional / National Importer /

Source: World Bank Group (2005d), Honduras Coffee Value Chain.

Figure 10 Honduran Coffee Cluster: Interaction of Stakeholders

Support and Support Services

Source: World Bank Group (2005d), Honduras Coffee Value Chain.

Box 4: Cost and Time Measurements

in evaluating the overall competitiveness of the chain. • Ministry of agriculture

The more value a firm can add to a product for a

Value Adding Total Value Added

Figure 11 Factor Productivity Measures

Productivity Metrics Labor Productivity

Capital Efficiency and Productivity Inventory Metrics

Capital productivity measures from a financial

Figure 12 Sample Benchmark Indicators for a VCA

fabric) in Kenya are almost three times those in Hon-

5. World Bank Group (2006), Doing Business 2007: How to

Figure 13 A Comparison of the Kenyan and Honduras T-Shirt Value Chains

SOURCE MAKE DELIVER

FOB Cost Per Import Raw Material Labor Cost / Outbound