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A measure to turn the vision of the
government for the leather industry into a reality,
which was outlined by Prime Minister Meles Zenawi in
2006, was implemented two weeks ago. At least, that
is what the government hopes the 150pc tax imposed
on the export of crust leather, on Monday, December
12, 2011, will achieve.
“Our strategy is to produce finished
leather and leather products both for export and
local markets,” Meles said during a meeting of the
Africa Task Force, conducted at Brooks World Poverty
Institute, Manchester University, United Kingdom. It
was delivered at a meeting to evaluate policy
options, especially for accelerating growth in
Africa, where the prime minister wanted to have
certain options considered, such as the involvement
of the developmental state, outside of what he
called “neoliberal orthodoxy.”
Although, in the last half decade, a
flourishing leather sector, in which the
developmental state works in close relation to the
private sector, has not been forthcoming, at least
not at the pace his government had hope for. Its
plan of collecting close to half a billion dollars
in revenue from exports at the end of its previous
five-year economic plan (2009/10) was not achieved.
The collection was only 75.5 million dollars, far
less than its plan.
Despite this lacklustre performance,
the government set the same revenue target in its
latest five-year economic plan, which extends to
2014/15. The sector is among eight that the
government has emphasised, including sugar, cement,
metal, textile, and garment industries, for the
period.
In 1999, the then-Ministry of Trade
& Industry (MoTI) had established the Leather &
Leather Products Technology Institute (LLPTI) with
the main objectives of training professionals,
conducting research, rendering consultancy services,
and providing technical support. However, the
institute, which has lacked trained professionals as
well as capacity, was unable to bring about the
changes officials were expecting.
Since the announcement of the latest
Growth & Transformation Plan (GTP), in September
last year, there has been a major overhaul at this
institution. Re-established as the Leather Industry
Development Institute (LIDI), it has signed a 5.4
million-dollar contract with the Centre for Leather
Research Institute (CLRI), an Indian company, to
improve its internal capacity. Officials at the
institute expect this contract, which covers three
years and has three phases, to bring vital knowhow
to improve the institute’s ability to support the
industry.
Knowhow in the sector is what CLRI,
established in India in 1948, to provide innovation
in leather processing as well as creative designing
of leather products, brings to LIDI. In the first
phase of the contract, CLRI is to study the overall
structures and management setup of the institute and
prepare plans based on the study in the second
phase. The last phase will see evaluation and
validation of the whole programme.
Through this arrangement, around 35
institute staff members are to get managerial
training from India for their postgraduate and
doctoral degrees. Also included are 70 short and
long-term training sessions.
This programme was financed by the
Engineering Capacity Building Programme (ECBP), a
reform programme intended to speed up industrial
development in Ethiopia, which has been involved in
the development of the leather sector.
However, capacity is not the only
limitation of the sector, as problems in market
dynamics and quality of supply have proved
difficult.
From the supply of raw skins and
hides to crusted leather, availability in the local
market was affected by lucrative prices in the
international market, which saw them being availed
mainly for export. Having banned the export of
rawhides and skins a few years ago, in a bid to
ensure that exported materials had added value, the
government recently reverted to price caps for the
local market and high taxation for exports,
otherwise known as an export tariff.
Developing the institutions and
policy instruments to curtail rent seeking and
promote value creation was one of the major
objectives Meles saw his administration taking, in
building a developmental state.
Such a move came in April when the
price of hides and skins were capped at 47 Br and 80
Br, respectively. This came following the Easter
holiday when prices soared as high as 150 Br a skin.
Although meant to regulate the
industry and enable factories involved in the
production of finished goods to get supplies at
affordable prices, the cap never took effect. This
was due to the lack of enforcement, officials at the
LIDI admit.
It was after this that they decided
to go after what they thought was the root of the
problem: the export of crusted leather.
Crusted leather is semi-processed
leather, produced after the wet operation, where the
skin is cleaned after soaking it with water and
removing the hair.
It is exported in this way or used
by leather factories in the production of
value-added items like jackets, gloves, and shoes.
However, the demand from those involved in export
and the local factories created a rush to grab
whatever skins and hides there were on the market,
pushing prices skywards.
Most of the income from leather
exports last year came from crusted leather, which
accounted for 67.3pc of the 104.1 million dollars
earned. The tax aims to control the price hike of
skins and hides on the market and, as a result,
force out the middlemen who speculate on prices,
Berhanu Serjabo, director of corporate
communications of the LIDI had told Fortune when it
was announced a few weeks ago.
This move, which Meles talked about,
was in the works back in 2006, at the time of his
speech.
However, it comes as a blow to the
factories involved in the export of crusted leather.
Out of the 26 tanneries, only six process crusted
leather into finished products for export, while the
remaining 20 are only involved in export.
“We were informed of the
transformation a year ago and have been preparing
since then,” Redwan Bedada, general manger of Mojo
Leather Factory, told Fortune. “However, the time
given has not been enough to make the complete
shift.”
The company, which has spent 10
million Br, so far, to create the capacity to
produce finished leather goods, expects to incur a
cost of an additional five million Birr to acquire
the new machinery for processing.
“We will change our marketing
towards finished leather products, however, it will
reduce the company’s income by half,” the general
manager of the company, which exported 10,000 pieces
of crusted leather last year, told Fortune.
Its ability to produce up to 2,323
sqm daily, once the machinery is installed, may not
generate the company considerable income compared to
what was available in the international market for
crusted leather before the taxation, he believes.
Nonetheless, it was not a move that
came out of the blue. After all, those involved in
the sector had been warned that such a move was
coming a year ago, to give them time to upgrade to
the processing of finished products. Furthermore,
the concept had been in the works for much longer.
“We have provided loan facilities at
low interest rates and export credit guarantees,”
Meles had said, about the leather sector which he
thought was a model of the relationship between the
state and the private sector. “On the other hand, we
have announced our intention to begin to tax the
export of semi-processed leather over the next few
years, to discourage those who do not wish to
upgrade and encourage those who do.”
It is, indeed, good news for those
involved in the export of finished leather products,
which now see stability in the supply and price of
hide and skins as well as crusted leather.
The supply of raw materials was
highly dependent upon the benevolence of tanneries,
which usually preferred to export, according to
Solomon Temechache, acting general manager of
Anbessa Shoe Factory, which has a production
capacity of 4,500 pairs a day.
The taxation, which makes it very
costly for companies to export crusted leather, is
what Tatek Yerga, general manager of Batu Tannary
Plc, sees as bringing stability to the price of
hides and skins, increasing the company’s earnings.
The company brought in 923,000 dollars by June 2011,
exporting shoes to Europe and Asia.
The export of shoes is one area in
the industry that has seen a marginal improvement in
export performance, creating an international market
linkage. One such linkage was initiated through
USAID’s Agribusiness and Trade Expansion Programme (ATEP).
The programme, which began in 2006, linked seven
local companies with three US companies in June
2010. One of the three US companies was Brown Shoe
Company Inc, one of the biggest shoe retailers and
wholesalers in the US, which recorded sales of 2.3
billion dollars in 2009.
Although Ethiopia has a definite
comparative advantage, with the biggest livestock
population on the African continent (and the tenth
largest in the world), easy accessibility to quality
leather is lower when compared to neighbouring
countries.
During the 2010/11 fiscal year, the
total population of cattle was 53.3 million, while
sheep and goats numbered 25.5 million and 22.7
million, respectively, according to the Central
Statistical Agency (CSA). Ethiopia’s figure for its
cattle population is far greater when compared to
that of Kenya and Sudan, which have a population of
11.7 million and 39.8 million, respectively. When
comparing sheep and goat populations, Kenya has 1.7
million and 24.7 million, respectively, while Sudan
has 48.9 million and 39.8 million.
Despite having a large population,
the off-take rate, which shows the sale and
consumption rate, of Ethiopia when compared to these
countries is much lower. The annual off-take rate
from the cattle population is estimated at seven per
cent, while Kenya and Sudan have 10pc and 20pc,
respectively. But, the rates for sheep and goats in
Ethiopia are 33pc and 38pc, respectively. These are
30pc and 29pc in Kenya and 45pc and 30pc in Sudan.
In the last fiscal year, 5.5
million, 5.8 million, and 4.5 million head of
cattle, sheep, and goats, respectively, were
slaughtered out of the total population in Ethiopia,
at the individual level. However, the traditional
slaughtering systems result in the supply of hides
and skins of poor quality, including skin diseases.
Household slaughtering also contributes to low
supply, as most hides and skins do not make it to
the market.
The annual demand of hides was
around 5.9 million pieces, while it was 14.7 million
for skins in 2008, according to data from the
Ethiopian Investment Agency (EIA) published that
year. However, during the same year, only four
million hides and 12 million skins were supplied.
While the new taxation directive,
which was signed by Sufian Ahmed, minister of
Finance & Economic Development (MoFED) may alleviate
the supply of raw materials to factories, Absessa
and Batu foresee another challenge on the horizon.
With the government focusing on the
export of finished goods, providing quality products
that are competitive in the international market may
be a challenge, according to Solomon from Anbessa
Shoe Factory.
This is a reality that the LIDI is
mandated to change. The lack of marketing knowhow
and skilled manpower in the processing of quality
finished products are the Achilles heels of the
industry.
The institute can now conduct
laboratory tests and issue quality grades for
leather products that are meant for export. It has
received two accreditations from the South African
National Accreditation System (SANAS), in 2008/09
and in 2010, which enables it to do that. The
certification allows the personnel, methods,
equipment, and laboratory tests conducted by LIDI to
be used to facilitate entry into strictly regulated
markets like the European Union.
However, the challenge of providing
competitive products is not that worrying, according
to Solomon.
“Its impact will be only for the
short-term as companies shift and concentrate on
quality to attract the international market,” he
told Fortune.
This is a view shared by Redwan from
Mojo, which is in the final stages of setting up its
factory. What his company will lose in revenues from
the export of crusted leather will be made up by
offering better finished goods, he believes.
It is exactly this direction that
the government wants to see the industry take to
increase revenues. Revenue from the export of shoes
totalled 8.8 million dollars out of the 104.1
million dollars earned from the export of leather
and leather products last year, while finished
leather brought 24.9 million dollars, and leather
made goods brought 200,000 dollars.
This is far less than what the
government had expected to earn. It had estimated a
collection of 70.9 million dollars from finished
leather, 59.5 million dollars from shoes and 840,000
million dollars from leather clothing. Of the
overall performance, collection was only 58pc of the
estimated 180.4 million dollars.
The flourishing sector, one that
models the results of the relationship between a
developmental state and the private sector, is yet
to come. The new tax instrument that is supposed to
help the sector toward that direction comes after
the government collected 23.3 million dollars out of
the 206 million dollars expected this year. |
